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MARKETS

US stocks traded definitively lower on Friday, ending the week down ~2.4% as markets navigate escalating tensions in the Middle East, higher rates, plus everything we learned this week from Corporate America.

The increasing geopolitical concerns and the economic and financial market impact of higher yields sent the VIX back above 20, signalling investors to assume a more risk-off stance. 

A look across markets and asset classes shows investors are leaning into traditional areas of relative defence: Gold and Treasuries inflows stand out here, and Oil is a favourite geopolitical hedge.

The recent increase in Gold and Oil prices is primarily attributed to concerns about the Israel-Hamas conflict and its potential to spill into other parts of the Middle East. This development has also raised questions about natural gas and hurt airline stocks. In addition to the tensions in the Middle East, the messy state of domestic politics in the US, with the House of Representatives still without a speaker, increases the likelihood of a government shutdown when funding expires on November 17th. These geopolitical and political factors contribute to market uncertainty and affect various asset classes.

Markets will have much to digest next week on both the macro and micro front. In macro, focus on the preliminary 3Q GDP estimate, September PCE, the Richmond Fed survey for October, and the final October UMichigan consumer sentiment survey.

ASIA 

The MXAPJ (MSCI Asia-Pacific ex-Japan) index fell by 3%, with significant declines in China (CSI300 -5%, MXCN -4%), Singapore, and Hong Kong (both -3%). Malaysia remained flat, and India saw a 1% decline, outperforming other markets.

While China's Q3 GDP and September retail sales exceeded market expectations, these positive data points failed to support the markets. However, this could be due to various factors, including the Biden administration's restrictions on AI chip exports and China's ongoing property market concerns. For instance, Country Garden missed a $15 million coupon repayment, and property prices in China fell further in September.

And while the supply side has upped their GDP forecast, some Chinese experts believe there was some very creative bookkeeping on the growth numbers. Well, slap me silly, but if China is mired in deflation, according to its statisticians, how is a bounce in real GDP possible? One economist at S&P Global said Chinese officials are "basically overstating real growth" when the PPI falls, and quite possibly by a lot.

In other regional economies, Malaysia's Q3 GDP growth was robust, driven by solid services activities, which grew by 3.3% year-on-year. The Bank of Korea (BoK) decided to keep its policy rate on hold due to elevated uncertainties regarding disinflation and geopolitical risks. However, Bank Indonesia surprised markets with a 25-basis point hike.

ASIA FOREX

Most Asian currencies weakened against the US dollar, with the Indonesian Rupiah (IDR), Malaysian Ringgit (MYR), and Thai Baht (THB) experiencing a 1% decline. Foreign investors were net sellers in China A-shares (Northbound -US$3.3 billion) and Taiwan (-US$1.7 billion). The biggest drag was likely higher US rates and escalating Middle East tension as investors shun risky assets for safer bets and risk-off hedging strategies.

The market's preferred gauge (SAFE) of China FX flows shows net outflows of around US$75bn in September, the fastest pace since late 2016, and US$42bn outflows in August. Foreign investors' net selling of equities and bonds slowed. Still, the current account showed net outflows in September on the back of faster services trade outflows, lower goods trade-related inflows and higher income and transfer outflows.

G-10 FOREX

“Swissy never lies.”

The Swiss Franc (CHF) often appreciates in times of market worry, making it a reliable indicator of safe-haven flows. This has been evident in the weeks following the escalation of conflict in the Middle East, and it is expected to remain a dependable gauge of market sentiment and a hedge in the event of further escalation. The Swiss Franc's historical tendency to appreciate during periods of geopolitical turmoil and rising inflation concerns is supported by various fundamentals, including Switzerland's substantial international investment position surplus and a track record of neutrality. In such circumstances, the Swiss Franc shares similarities with gold, another safe-haven asset. Increased uncertainty can increase the demand for gold, one of Switzerland's key exports.

Recent messages from Fed officials, including Chair Powell, suggest they closely monitor economic data but remain unconvinced that more robust economic activity will hinder progress toward their inflation target. The recent increase in long-term Treasury yields could be a substitute for additional rate hikes. This shift in the Fed's stance carries significant implications for the US Dollar. When monetary policy is expected to not respond to robust data with higher interest rates, the currency's responsiveness is lessened. 

The Federal Open Market Committee (FOMC) has essentially joined the chorus of policies resisting further appreciation of the US Dollar. This stance aligns with the relatively stable Japanese Yen (JPY) and Chinese Yuan (CNY), both of which have been functioning as anchors for the Dollar Trade-Weighted Index (TWI). The influence of policy preferences is increasingly causing a disconnect between economic data and the Dollar's movement. 

Traditionally, G10 currencies are more responsive to short-term interest rate differentials. In contrast, specific emerging market (EM) currencies are sensitive to long-term rates and feel the pressure of higher US yields. Indeed, Asian currencies live life vicariously via bond and equity inflows.

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