PARIS (Reuters) – After two tumultuous weeks, the return to calm seems elusive for the markets, which will once again have to deal with geopolitical uncertainties, a probable break from the European Central Bank (ECB), bond yields still at their highest despite the demand for safe assets, and company results not being enough to reassure investors.
Overview of the market outlook for the coming days:
1/ RISK OF CLIMBING
The conflict between Israel and Palestine will continue to punctuate the markets next week, as investors become increasingly concerned about contagion from the conflict to the rest of the region.
Paradoxically, some traditional safe assets like the dollar and sovereigns remain under pressure from central banks, which has limited investors’ options.
“The only real hedges against conflict-related risks have been gold and energy, particularly oil,” summarizes Paul Jackson, global head of asset allocation research at Invesco.
An extension of the conflict could dry up Iranian oil supplies and complicate logistics chains dependent on the Suez Canal.
Furthermore, the resumption of trade tensions between China and the United States is increasing the nervousness of the markets, but “there is in any case no hedge against this risk, with global ramifications”, summarizes Paul Jackson.
2/ THE ECB FACED WITH RISE IN PERILS
The European Central Bank (ECB) is expected to maintain rates at their current level on Thursday, for its penultimate monetary policy meeting of the year.
The central bank’s message will nevertheless be listened to carefully by the markets, because the European economic outlook remains degraded and under pressure from real rates which have risen sharply since the last meeting in September, while the rebound in oil prices raises fears of a resumption of inflation.
The ECB should therefore spare its options and leave its December decision open.
“Before the pandemic, most central banks would probably have ignored the rise in oil prices, with some even considering that this rise would end up being deflationary, undermining purchasing power and industrial competitiveness,” recalls ING.
“But in an era of persistent inflation, the ECB could prefer to remain credible rather than worry about growth in the euro zone and opt for a further rate hike in December if the inflation outlook picks up.”
As such, the PMIs expected on Tuesday could be added to a long list of indicators at half mast and confirm the decline in activity in Europe, while inflation for October and GDP for the third quarter will be published on Friday .
THE ECB could also comment on peripheral yields, which have increased since Italy unveiled a deficit budget for 2024, but should maintain its reassuring speech.
“The ECB could recall that the Pandemic Emergency Purchase Program (PEPP) constitutes the first line of defense, followed by the Transmission Protection Instrument (TPI),” say BofA strategists.
“But the message will more likely be that movements in yield spreads do not suggest that fragmentation is occurring.”
3/ OVERHEATED YIELDS
US yields declined on Friday in a context of risk aversion, but selling pressure remains strong on the interest rate markets: markets are revising their key rate projections, and large issues of US debt are upsetting the supply-supply balance. request.
While several policymakers have said high yields limit the work the Federal Reserve needs to do to achieve a sufficiently restrictive level of monetary policy, Jerome Powell, the institution’s chairman, warned Thursday that it only decreases. “at the margin” the need for the Fed to raise its rates again, American activity remaining solid.
“The still robust US macroeconomic figures have made Fed stakeholders inflexible in their fight against inflation, and every chance they get, this message has been repeated,” underlines Florian Ielpo, head of research. at Lombard Odier AM.
Investors will therefore be closely watching next week’s data series, which includes new home sales on Wednesday, durable goods orders and third-quarter GDP on Thursday, consumer confidence and the PCE consumer price indicator. consumption Friday.
The data will be all the more important as it is the last inflation indicator before the Fed’s next monetary policy meeting on November 1.
4/ THE “MEGACAPS” EXPECTED AT THE TURNING POINT
The results season began on October 13 in the United States, but the majority of companies have yet to reveal their quarterly figures.
Next week, half of listed companies must publish their results in the United States, and 30% of these companies in Europe, according to Barclays calculations.
Four of the seven “megacaps” (Microsoft, Alphabet, Meta Platforms and Amazon), the seven American technology companies whose performance alone was enough to support the American equity indices in the first half of the year, will publish their results next week and any disappointment could have a greater impact on risky assets.
“In a context of high macroeconomic volatility, the first results of the third quarter have failed to support the morale of equity investors: earnings per share are higher than consensus, but the price reaction is oriented downwards, and failures are punished,” notes Barclays.
In France, Kering and Hermès will publish their quarterly performances on Tuesday, after the disappointment at LVMH. Also expected are, among others, Carrefour (Wednesday), Danone, BNP Paribas and TotalEnergies (Thursday).
(Written by Corentin Chappron, edited by Blandine Hénault)
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