Geopolitical Risks Back in the Frame

Gold and the USD both rose in tandem with each asset being the recipient of safe haven buying demand. The Dollar Index (DXY) pushed back above the 101 level, with the greenback reclaiming some of the ground it lost following the Fed cut. The USD has also been given an assist by Jerome Powell this week after the Fed Chairman poured cold water on expectations that we could see another oversized rate cut by year-end. Powell said the Fed was in no hurry to cut rates at a speech on Monday. Meanwhile, there remains a gap between the Fed’s projections of a total of 50bp of cuts by the end of 2024 and that of the broader market which is hoping to see closer to 75bp of further cuts.

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Gold again made a move back beyond $2650 on news of rockets firing in the Middle East. One of gold’s hallmarks in 2024 has been its ability to rally in both times of risk-on and risk-off scenarios. And we are now seeing the latest chapter of this, with gold likely to remain a favourite asset in investor’s portfolio’s is hostilities continue to rise on the geopolitical front. During Asian trading hours on Wednesday, gold was trading at $2662, below resistance at $2680 and above support at $2640 and $2616. While gold stands to be a beneficiary of any sustained risk aversion, a stronger USD could be a potential headwind for the precious metal.

The oil price has been absent of risk-premium in recent months but a moderate degree of this has been injected back into the energy market in reaction to Iran’s latest actions. The WTI contract made a move back above $70 per barrel, but this so far appears to be a constrained move given the potential supply disruptions should Iran be drawn into a broader conflict. On Wednesday, US crude was sitting at $70.60, with resistance ahead at $73 which if broken could propel a move back towards the $75 per barrel level if markets get increasingly jittery about the oil supply picture.

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Flaring tensions in the Middle East is something which financial markets have previously shown an ability to shrug off, where there is an initial session or two of risk aversion before it’s back to business as usual. Whether or not we see a similar pattern this time around will depend upon the nature of Israel’s response. If retaliatory measures (from both sides) continue to ratchet upwards this would not bode well for risk assets.

Right now, we have geopolitical risk coupled with ‘event risk’ on the economic calendar in the form of US jobs data this week which could signal whether we are likely to get either 50bp or 75bp of cuts from the Fed by year-end. Friday’s Non-Farm Payrolls (NFP) figure is expected to show 144k of jobs growth for September. Any significant upside beat on this would likely support the Fed’s base-case of another 50bp of cuts this year, while any large downside miss could bring another over-sized rate cut into the equation for November.

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