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A look at the day ahead in European and global markets

By Wayne Cole, Chief Correspondent, Treasury

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Asia has been in a contemplative mood so far on Friday after another week of wild swings in bonds, equities and commodities. The oil market was the latest to be visited by volatility as prices slid almost 5% overnight, in part due to concerns about oversupply and diminishing demand.

Oil, miniatures of oil barrels and U.S. dollar banknote are seen in this illustration taken, June 6, 2023. REUTERS/Dado Ruvic/Illustration

Speculation also played a part as algos, CTAs, and trend following funds took to selling when Brent broke $80 a barrel, with the drop from $80.70 to $78.40 coming in a single hour of trade. It was idling around $77.60, after finding support at $76.60.

That’s a long way from the September peak of $97.69 and comes despite wars in Ukraine and the Middle East. Presumably OPEC+ will have something to say about this ahead of their next meeting on Nov. 26.

The drop bodes well for a further decline in headline inflation globally and should go down well with U.S. consumers where confidence is closely correlated to the price of gas.

Talking of disinflation, Walmart executives on Thursday noted prices of general merchandise goods such as apparel and home goods had fallen between 3% and 6%, and it was planning on cutting further for the holiday season. The spectre of margin compression, however, took 8% off its share price.

All of this, plus a rise in weekly jobless claims, was a balm for bonds and two-year Treasury yields are down 21 basis points for the week at 4.85%, their best weekly performance since March.

Fed fund futures have priced out almost any risk of another rate hike from the Federal Reserve and a 34% probability it might ease as early as March. The market now implies 98 basis points of cuts next year, compared with 73 basis points a week ago.

Interestingly, analysts at Westpac note U.S. economic data has been exhibiting a pattern of residual seasonality post-pandemic where the news is strong mid-year and through Q3, only to soften into year’s end. If that holds, the bond rally will likely have further to run.

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