Financial Markets’ Weekly Recap

Gold

Gold prices surged last week, driven by safe-haven demand amid escalating geopolitical tensions. The rally began as Israel declared war and launched a military operation against the Palestinian militant group Hamas after an unprecedented attack on Israel. Gold, being a traditional safe-haven asset, gained 1.6% on Monday, marking its most significant one-day gain since early May.

US Treasury bond yields declined as investors priced in a no change in the Fed policy rate for the rest of 2023. Consequently, Gold stabilized near $1,860. The decline in yields allowed XAU/USD to reach a two-week-high above $1,880. The market sentiment was influenced by varying statements from Fed officials. While some, like Atlanta Fed President Raphael Bostic, indicated that the Fed doesn’t need to increase rates further, others took a more cautious tone, suggesting the need for further rate hikes due to strong economic activity.

Later in the week, the US Bureau of Labor Statistics reported that inflation, as measured by the Consumer Price Index (CPI), held steady at 3.7% on a yearly basis in September. Despite this, the 10-year US yield rose after the CPI figures, causing XAU/USD to lose some of its gains.

However, Gold rebounded as the 10-year yield turned south, breaking above $1,900. Geopolitical tensions escalated further as Israel called for evacuations in Gaza City, prompting investors to seek safety in Gold.

In the upcoming week, investors will focus on US Retail Sales data and China’s third-quarter Gross Domestic Product (GDP) data. The Fed’s blackout period before the November policy meeting begins, during which Fed policymakers are expected to influence market direction. Geopolitical tensions, particularly in the Middle East, will continue to influence Gold prices, with an escalation likely to further boost demand for the precious metal.

GBP

The pound experienced a slight increase on Friday, recovering after its significant drop against the dollar the previous day, marking its largest daily decline since March. This decline was triggered by U.S. inflation data that came in higher than anticipated, causing concern among investors.

On Friday, sterling rose by 0.1% against the dollar, reaching $1.2178, after having fallen by 1.1% the day before, as the dollar strengthened against various currencies. Against the euro, the pound also saw a 0.1% increase, reaching 86.40 pence. However, on Thursday, sterling performed poorly against the euro, experiencing a 0.3% decrease, which marked its most significant one-day fall in three weeks.

Looking ahead to next week, data releases could provide insights into the potential actions of the Bank of England (BoE) during its upcoming policy meeting in early November, where decisions about interest rates will be made. The BoE has been facing challenges due to persistently high inflation and record wage growth resulting from a tight labor market.

It’s worth noting that the UK currently has the highest inflation rate among G7 nations, and projections from the International Monetary Fund indicate that it is expected to have the slowest growth next year. Despite better-than-expected growth in August (albeit at a modest 0.2%), challenges persist.

Currently, money markets suggest that traders believe UK interest rates are very close to their peak, with only a 50/50 chance of another rate hike within the BoE’s existing policy cycle.

Oil

Oil prices jumped $2 on Friday after the United States tightened its sanctions program on Russian crude exports, raising concerns about supplies in an already tight market, and global inventories are expected to decline during the fourth quarter of the year.

Brent crude futures rose $1.96, or 2.28 percent, to $87.96 per barrel by 0819 GMT.

US West Texas Intermediate crude rose $1.98, or 2.39 percent, to $84.89 per barrel.

Both crude oils had previously achieved gains of $2.

Despite the fluctuations during the week in both benchmarks, Brent is heading for weekly gains of about four, while West Texas Intermediate crude is heading for a rise of more than 2.5 percent during the week, after both contracts rose on Monday.

The rise was driven by the possibility of a disruption in exports from the Middle East after the Palestinian Hamas movement’s attack on Israel at the weekend, which threatened a potential wider conflict.

“The premium associated with geopolitical risks remains… and is likely to support oil prices in the short term,” said Kelvin Wong, chief market analyst at OANDA in Singapore.

He said the market is more concerned about shrinking supplies from the Middle East and Russia.

The United States on Thursday imposed its first sanctions on the owners of tankers carrying Russian oil at prices above the G7 maximum price of $60 per barrel, plugging loopholes in a mechanism designed to punish Moscow for its invasion of Ukraine.

Russia is the world’s second-largest oil producer and a major exporter, and tighter US scrutiny of its shipments could reduce supplies.

The UK’s Office for National Statistics (ONS) announced on Friday that it would postpone the publication of some of its upcoming labor market data by a week, shifting the release to October 24. Specifically, data from the ONS’ Labour Force Survey (LFS), crucial for calculating Britain’s unemployment rate, will no longer be published on October 17, as originally scheduled. However, the ONS confirmed that figures on workers’ earnings, job vacancies, and real-time employment data from Britain’s tax office would be released as planned on Tuesday.

The delay in the LFS survey data was attributed to declining response rates, as the survey is currently undergoing updates to include more respondents and will incorporate questions asked in different ways starting from early 2024.

This labor market data holds significant importance for the Bank of England, especially the earnings figures, as the central bank assesses whether it needs to resume its series of interest rate hikes. The Bank of England had decided to keep interest rates on hold in September after implementing 14 consecutive hikes.