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MARKETS

After an up-and-down New York morning session, US stocks are trading significantly lower as investors digest Chair Powell's, not what the rally doctor ordered, comments and are utterly gutted by reports the IDF has received the "green light" from top commanders to begin a ground offensive against the Palestinian militant group Hamas.

As anticipated, Jerome Powell delivered a carefully nuanced speech on Thursday during his highly-anticipated address to The Economic Club of New York.

Intent to "thread the needle," his message echoed the subtle communication from his fellow policymakers over the last ten days. Powell emphasized that the recent upswing in long-term US yields, especially the rise in real rates and the continuous recalibration of the term premium, has led to constricting financial conditions. At the same time, this development can potentially reduce the necessity for an additional interest rate hike.

After initially reacting favourably to the Chair's comments suggesting the Fed will not raise rates at the upcoming November FOMC meeting, markets reversed course (again). US stocks traded considerably lower after Powell confirmed the Fed remains in data-dependent mode while emphasizing that it “remains to be seen” whether higher yields would actually substitute for additional hikes.

I'm sure Powell didn't intend to create significant waves. But selling waves he created when responding to a journalist's query on the state of rates with a somewhat hawkish retort:" Policy is not too tight, and the foremost risk to the economy is inflation." Unfortunately for markets, these are the comments traders, and investors of all stripes will cling on to 

Of course, the main event is sadly shaping up in the Middle East.

Reversing early NY morning declines, oil futures finished the day much higher. The shift was triggered by media reports indicating that Israeli armed forces are preparing for a ground offensive in northern Gaza. This development can potentially escalate tensions in the already volatile Middle East.

The Israeli military has reportedly received the "green light" from top commanders to initiate a ground offensive against the Palestinian militant group Hamas.

Meanwhile, US President Joe Biden is scheduled to deliver a primetime foreign policy address to the nation and a global audience at 8 p.m. EDT after visiting Israel on Wednesday. However, the second part of his trip was cut short due to the cancellation of a regional summit with Arab leaders, further complicating efforts to find a diplomatic solution.

Biden is expected to argue that supporting Ukraine and Israel is a matter of US national security when the world is at an inflection point. "He's going to make the case that the cost of inaction and the cost of walking away is much higher," according to one insider-knowledge official.

And adding fuel to the escalating firestorm, reports of an attack on the US military base Ain Al-Asad in Iraq involving drones and rockets on Thursday afternoon. Pentagon officials have confirmed that the US Navy destroyer USS Carney intercepted multiple missiles near the northern Red Sea. The situation remains fluid and continues to evolve. Of course, gold is the big winner here as events with direct US involvement tend to have a more considerable impact on gold, partly as investors seek bullion as a hedge of last resort. 

BONDS

So why aren't US bonds rallying? I think that has to be the biggest mystery. But it suggests that fiscal and governance concerns have prompted a repricing of the term premium as increased supply to fund large deficits now needs to be absorbed by price-sensitive buyers given the absence of the Fed bid and less in the way of participation from other price-agnostic investors, including banks, foreign participants and FX reserve managers.

FOREX 

Equity markets are becoming more susceptible to downside risks due to the rising interest rates and the challenges businesses face in maintaining their profit margins. If US equity markets continue to veer south, it will likely exert downward pressure on risk-related currencies while strengthening demand for the U.S. dollar. And with war drums beating in the Middle East, traditional safe-haven currencies like the Japanese yen and Swiss franc may become more attractive to investors seeking refuge from the escalation in the Middle East

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