Global markets have remained calm despite the conflict potentially becoming a proxy war between the US and Iran. As of this writing, US equities were marginally lower than they were at last Friday’s close and bond yields have lost some of the early-week safe-haven bid after mixed US inflation data and a series of tepid Treasury auctions pushed yields back up on Thursday. Oil and gold are up about 4% on the week, with most of the gains coming Friday, while the dollar has gained modestly on the week. The war has brought back memories of the oil spike following the 1973 Yom Kippur War. However, it’s important to note that the geopolitical and oil supply landscape has shifted dramatically in the past half-century.

MACRO NEWS

Israel declared a state of war last Saturday after Iranian-backed Hamas terrorists launched the bloodiest attack on the Jewish state in its history—an attack the group said it spent two years planning. In response to the multi-pronged assault, which caught Israel unprepared, targets linked to Hamas in Gaza have been pounded by Israeli airstrikes.

While there have been reports of scattered rocket fire from Lebanon and Syria, the conflict has occurred mainly near the Gaza Strip, on the border of which Israeli soldiers are massing in preparation for a ground offensive aimed at destroying Hamas. Given Iran’s support for Hezbollah, Palestinian Islamic Jihad and Hamas, observers are concerned that a wider war could play out on multiple fronts, posing a potentially enormous challenge for Israel’s military. On Thursday, US Secretary of Defence, Lloyd Austin, said the United States sees no sign of Hezbollah massing along Lebanon’s border with Israel, though Hezbollah warned Friday that it is ready to act “when the time comes.” US Secretary of State, Antony Blinken, who was in Israel on Thursday, has been traveling to several Arab states in an attempt to keep the conflict from spreading and to seek help in securing the release of hostages.

Israeli fatalities have surpassed 1,300, with thousands more injured, while more than 1,500 have been killed in Gaza. A US Navy carrier group is stationed in the eastern Mediterranean Sea near Israel, with a second on its way, in an effort to dissuade others from joining the conflict.

On Thursday, the US and Qatar agreed to suspend the scheduled release to Iran of $6 billion in oil money that had been impounded because of sanctions. US Treasury Secretary Janet Yellen warned Iran that nothing is off the table with regard to any new sanctions.

This past week, Israel formed an emergency unity government that includes a five-member war cabinet comprising Prime Minister Benjamin Netanyahu, two members of his Likud Party and two members of the opposition.

On Friday, before an expected ground invasion, Israel warned residents of Gaza City to evacuate to the south, but Hamas told citizens to stay put.

 

CANADIAN ECONOMIC NEWS

Sales of homes in BC were up in September by over 10 percent from the same time last year. However, our real estate association says sales are definitely being affected by high interest rates as buyers are struggling to meet requirements for mortgages. The next interest rate announcement from the Bank of Canada will be on October 25^th.

 

US ECONOMIC NEWS

Consumer prices in the US rose 0.4% in September from August, slightly exceeding expectations, and gained 0.3% with food and energy stripped out. Compared with a year ago, prices rose 3.7%, unchanged from the month before, while core rose 4.1%, a level slightly lower than the 4.3% recorded in August. However, the so-called super-core measure — core services except for housing — watched closely by the US Federal Reserve, rose 0.61% month over month, its third monthly rise in a row. Yields backed up Thursday after the release of the data.

The US Congressional Budget Office estimated this week that the US budget deficit reached $1.7 trillion in fiscal year 2023, which ended in September. Spending on mandatory programs such as Social Security, Medicare and Medicaid rose 11% while outlays for interest on the public debt jumped 33%.

The minutes of the Federal Open Market Committee’s September meeting hammered home the idea that rates will stay higher for longer as all the members of the committee agreed that policy must remain restrictive for some time.

 

EUROPEAN ECONOMIC NEWS

A liquid natural gas pipeline and a communications cable connecting Finland and Estonia were damaged this week, potentially by sabotage.

Poland is voting today in a high stakes national election. The results could have major ramifications for the country’s direction and the future of the Ukraine war. The ruling party, Law and Justice, is facing off in a tight race against a united opposition led by former Polish prime minister and European Council president Donald Tusk.

 

CHINA, EMERGING MARKETS and JAPAN ECONOMIC NEWS

After sales plunged, China’s largest private property developer, Country Garden, warned this week it could default on its international debt. The company has almost $200 billion in debt, about $10 billion of it is US dollar denominated. The company’s USD bonds trade at between $0.05 and $0.10 on the dollar, in line with the values of its peers that are headed toward liquidation. Country Garden has over four times as many projects underway as Evergrande, another giant Chinese property developer.

Concerns linger that a Country Garden default could affect Chinese wealth management products issued by shadow banks.

Consumer prices in China were unchanged year over year in September, and producer prices fell 2.5% from the year before, raising the specter that the country could fall into deflation. Both exports and imports fell last month, signaling a lack of economic dynamism. However, credit metrics showed improvement. It is rumored that China will raise its 2023 budget deficit in order to bolster its ailing economy, and they are said to be mulling over a new stabilization fund to support the stock market.

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