8th September - Middle East Escalation Fails To Wake The Markets
The only news of note has been an escalation in the Middle East today, as Saudi Arabia's oil facilities were the target of Houthi attacks with both drones and missiles. Saudi officials noted they would respond to the escalation, adding a second front to the tit-for-tat strikes between the US and Iran. On top of this, we also saw reports that the number of ships transiting the Strait of Hormuz fell to its lowest levels since May of this year, adding to the supply-side pressure on oil. Brent briefly rose above $100 per barrel today, before reports that Qatar is attempting to renew talks between the US and Iran. Brent has since fallen and is sitting at $98.60 as I write. US oil saw the same price action, reaching $92.80 before falling back to $90.10.
Outside of the Middle East, markets have been very quiet as everyone prepares themselves for the huge PPI and CPI prints later in the week.
Forex
The only real moves today in the forex markets were the NZD and the JPY, with the NZD losing ground and the JPY having a large intra-day swing. The DXY has been largely flat, barely moving from its opening mark around 98.90. Markets are waiting for the inflation prints on Thursday and Friday, which will have an even larger effect than normal due to the impact they will have on the FOMC decision next week. The markets are currently predicting a 58% chance of a rate hike, meaning the inflation prints are likely to move expectations significantly in one direction or the other and, as a consequence, will have a significant effect on almost all markets.
The JPY has seen a large swing over the course of the day. We saw the USD/JPY move as much as a full 1% overnight before recovering almost that entire amount over the course of the day. Yesterday, we saw a breakthrough of the key 155.000 level, which added to the effects of an increased expectation of BoJ rate hikes to give strength to the Yen. However, as the European markets opened, we saw the USD/JPY hit a key previous level of resistance at 153.000, which could have caused some profit-taking after the significant moves we have seen over the past week or so. Coupled with a lack of any fresh catalysts through the day, this gave the pair enough strength to bounce back to where it started the day at 154.300. Whether this was just profit-taking and the move will continue overnight and tomorrow will be an interesting development to look out for.
The NZD move is a continuation of the momentum from the past few days. On Wednesday last week, the RBNZ raised rates as expected but gave very dovish forward guidance alongside it. The NZD fell off a cliff on the day before correcting somewhat over the next few days. The market now seems to have corrected the overreaction on Wednesday and is continuing to bet against the NZD. The EUR/NZD is an excellent example of this, as the pair gained significant ground today and came close to Wednesday's highs. I would not be at all surprised if we see this continue for another few days at least, unless we have a catalyst specific to the NZD that changes its course.
Indices
The three main US indices have struggled today after the long weekend, with the Dow Jones the worst off of the three. The moves have not been significant, however, with the Dow only falling 0.4% to 52,850 as of writing, while the S&P fell 0.17% and the Nasdaq just 0.1%.
One thing that is interesting to note on a quiet news day is that OpenAI and Anthropic have been working to seek investment-grade credit ratings ahead of their eventual IPOs, which would give them access to the huge corporate bond market at lower interest rates. This ties into the continuing theme of the AI buildout being increasingly debt-funded, with huge gambles being placed on the fact that the AI complex is now 'too big to fail.' I would lean towards agreeing with this at this point, though I still think the markets are due for a correction after the enormous runs we have seen earlier in the year.
Precious Metals
Both Gold and Silver have been lower today, with Gold currently 0.72% down at $4,375 and Silver down 0.45% at $65.90. While both have seen falls over the past few days, the fact that they have not fallen more than a couple of percent after such a surprising jobs report last week is a very interesting thing to note. Normally, such a large beat in NFP and change in Fed interest rate expectations would move metals, so such a mild move implies that there is support for metals as we move into the inflation prints this week.
If we see hot inflation and a very likely interest rate hike, I can see the support for metals failing, and we may then test previous yearly lows. However, if we see a softer print and the Fed holds rates next week, it would not surprise me at all to see a significant run in precious metals for the next few weeks. The next 7-10 days or so could well be hugely consequential for metals.
Tomorrow's Market Drivers
There are no scheduled news releases, so the market will be solely focused on the inflation prints later in the week.
Middle East escalation - Any escalation in the Middle East could snap the markets from their slumber this week; as always, this remains something to watch out for.
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