Markets steadier as oil prices slip back, stocks climb

Trump calms fears of Iran strikes

Sentiment has improved somewhat at the end of what’s been a choppy trading week characterized by elevated volatility in bond and oil markets. Oil futures looked set to finish the week with solid gains but are now more likely to end lower as prices slip today.

Despite continued attacks on oil tankers and other targets in the Middle East by Iran and Houthi rebels, investors have been more focused on the volume of exports from the region, which according to various estimates, have recovered or even surpassed pre-war levels.

However, that rosy picture took a hit yesterday following reports that President Trump is considering ordering new military strikes on Iran. But Trump later took to his Truth Social platform to dismiss the speculation, writing that “we will not be attacking Iran at any time prior to the Midterm Elections”.

Crucially, there seems to be some progress in the negotiations for a new ceasefire, with Trump saying, “we are having productive discussions”.

Bond yields track oil prices lower

Whilst markets are not holding their breath for a quick resolution to the conflict, it’s encouraging that neither side is willing to abandon the negotiating table just yet and this is taking the pressure off oil prices today.

WTI futures are down about 1.5% to $90.15 a barrel, while Brent crude futures are 1.55% lower at $102.66.

The $90 and $100 levels for WTI and Brent, respectively, are becoming increasingly important support levels, as a break lower would mark an end to the upward trend that began in July. It could also help ease the bond selloff, as rising inflation risks have led investors to seek higher premiums.

There seem to be some signs of stabilization in bond markets, with the 10-year US Treasury yield declining to around 5.24% after struggling to rise past 5.35%.

French and UK 10-year yields are also sharply lower, as worries about an immediate budget crisis ebb. But Japanese yields are down the most today on reports that the Takaichi government plans to carry out a spending review to seek alternative sources of funding and avoid issuing new debt.

Gold bounces back as dollar rally stalls

With sovereign bond yields seemingly plateauing, at least for the time being, gold is enjoying a revival in bullish momentum, albeit only moderately.

The precious metal is testing the $4,200 level, as it recovers from Wednesday’s two-month low of $4,065.

Meanwhile, the US dollar is edging lower for a second day against a basket of currencies, though it’s not too far from Monday’s one-and-a-half-year peak. A slight cooling in Fed rate hike expectations has taken the steam off the dollar’s post-September FOMC rally.

Most Fed officials continue to support additional tightening but the message over the past week has been that there is no urgency to hike at every meeting.

Euro and pound on firmer footing

The somewhat less hawkish tone has been a relief for currencies under pressure from soaring government deficits and political risks such as the euro and pound. Both are slightly firmer on Friday at $1.1221 and $1.3238, respectively.

But the calm may not last long as both countries’ budgets will come under the spotlight later this month, with the ECB and Bank of England also keeping a close watch on the deficit reduction plans.

AI trade keeps equities afloat

In stock markets, European indices are in the green despite a mixed session in Asia, though the mood is broadly positive.

Wall Street futures point to a rebound today after both the S&P 500 and Nasdaq closed lower on Thursday. Despite some anxiety ahead of the start of the Q3 earnings season, optimism for AI-related stocks remains high.

OpenAI sparked a brief panic amid confusion about its revenue expectations. The ChatGPT owner disappointed some investors when it said annualized revenue reached $50 billion at the end of September, far short of the $70 billion expected. But it was later clarified that $70 billion is the full-year target and the company still expects to reach it.

The volatile nature of the market for anything AI-related is probably one reason why OpenAI has shelved its IPO plans for this year. Nevertheless, equity markets’ resilience in the face of so many headwinds is impressive.