Plenty to focus on for investors

So far, the threat of increased geopolitical tensions has had a limited impact on global equity markets or the oil price. Some would say surprisingly little. Yesterday’s well-flagged attack on Israel by Iran did seem to raise the stakes, resulting in something of a reaction from capital markets. Tehran said the attack was a retaliation for the killing of Hamas and Hezbollah leaders and an Iranian general. The price of oil rose, stocks sold off, and the dollar rallied. We will see if these attacks have wider consequences and set the stage for increased conflict within the Middle East. The fact that it was well flagged, apparently, meant that most of the missiles were shot down or missed their targets, and casualties were limited. One might have expected another spike in the gold price. However, that was not the case.

Managing expectations is always tricky. Rachael Reeves has attempted to do this ahead of the 30th October budget, running the risk that her cautionary stance risks leading the country into an economic downturn. The uncertainty as to what Rachael Reeves will introduce at the end of the month appears to be the catalyst for business optimism, dropping to a 9-month low.  The month-on-month decline in the Future Output Index from the survey was the second-steepest on record, beaten only by that registered in March 2020. Ms Reeves cannot take all the blame; part of the decline in business optimism was attributed to the broader uncertainty surrounding the global economy. Later in the week, we get the monthly services PMI; that number gives a clearer idea of what UK employers think.

In Europe, bets increased for a cut in interest rates this month as Euro area year-on-year inflation came in at 1.8%, below the ECB’s target as that economy continues to struggle.

There was a weak US ISM Manufacturing report out yesterday, as the index missed expectations once again, coming in at 47.2. In the last two years, activity in the manufacturing sector has contracted for all but two months. However, it must be remembered that US manufacturing makes up a much smaller part of the economy than it used to. Only five of the eighteen major manufacturing industries reported growth in September, while thirteen reported contraction. Respondent comments are noting a general slowdown in the economy and are adjusting production accordingly. The latest US Job openings reported a rebound in new opportunities ahead of Friday’s more significant employment report.

Speaking at the National Association for Business Economics Annual Meeting in Nashville, Tennessee, Jerome Powell continues to paint an overall positive view of the US economy. Describing it as “strong”. Adding the Fed has made significant progress in achieving our dual-mandate goals of maximum employment and stable prices. Stocks in Europe sold off yesterday and are expected to rebound modestly this morning.