Oil price rally sparked by global tensions

Today, oil prices rallied over 5% on heightened geopolitical tensions as Israel prepares to enter Gaza and with US sanctions on Russian oil exports. This has negative implications for inflation. Gold, silver, and other commodities were also stronger. Better-than-expected bank earnings boosted the Dow, but the tech-heavy Nasdaq was off 1.5%, continuing a recent slide. A leading sentiment survey reported increasingly cautious consumers.

Bottom line: risk-off.

TODAY’S MAJOR NEWS

Oil prices surge on Israel's war, Russian sanctions

Crude oil prices surged today as the US tightened sanctions on Russian crude oil exports, adding to previous concerns that the escalating Middle East conflict could hit oil shipments. The US placed sanctions on owners of tankers carrying Russian oil priced above the G-7’s price cap. That price cap was set at $60 as the West attempted to limit revenue from Russia to fund its war on Ukraine while punishing it for the invasion. Traders fear that the increased sanctions may reduce supplies coming from the world’s second-largest exporter of crude oil, leading to tighter global inventories. OPEC forecasts a drop in crude stockpiles of 3 million barrels per day in the current quarter, assuming no additional reductions resulting from the Middle East conflict.

Israel-Hamas war heightens global risks

• Israel warned a million Palestinians to evacuate areas of north Gaza to the south ahead of an anticipated ground assault on the region this weekend, following several days of pounding the region with an air attack
• The US and other Western nations have increased preparedness, fearing terrorist attacks on Jewish targets
• Saudi Arabia is reportedly freezing its plans to normalize relations with Israel, fearing that would anger other Arab neighbors
• This week's events have pushed Saudi Arabia toward engaging with Iran as it attempts to keep the violence from spreading regionally
• Commodity traders, especially in the energy sector, are increasing long positions to anticipate price spikes

Consumer sentiment worsens, inflation expectations rise

• The University of Michigan Consumer Sentiment Index registered a 7% drop for its first October reading, with all demographic groups posting deteriorating sentiment
• The index declined to a reading of 63 in October, compared to a forecast of 67.5 andbenefitting 68.1 in September
• Inflation expectations for the year ahead rose to 3.8% this month from 3.2% in September – the highest reading since May 2023, and worrying for the Fed

Bank earnings beat expectations

Major banks JPMorgan, Citigroup, and Wells Fargo beat third-quarter earnings forecasts this morning, notably  from higher interest rates and better net interest income (the difference between lending and borrowing rates).

Soft commodities attract investment after market outlook published

Money flowed into the grain and oilseed sector on Thursday following the US Department of Agriculture’s World Agricultural Supply and Demand Estimates (WASDE) release. The agency cut corn and soybean yield and demand estimates, with soybeans facing tight demand conditions. A projected surplus of soybean stocks leaves little margin for additional yield cuts, and the agency typically cuts its soybean yield in crop reports. That would further tighten supplies, requiring more reductions in exports.

TODAY’S MAJOR MARKETS

Nasdaq leads market decline

• Nasdaq led markets lower, down 1.2% at lunchtime, with the S&P 500 and Russell 2000 off 0.5% and 0.6% respectively
• Foreign equity markets were weaker overnight, with the FTSE 100 and Nikkei off 0.6% and the DAX down 1.6%
• The VIX, Wall Street’s fear index, saw a significant one-day increase to 19.5, indicating growing investor caution

Bonds yields stabilize, dollar unchanged

• 2- and 10-year yields traded down to 5.04% and 4.63%, respectively
• The dollar index was unchanged at 106.7
• Versus the dollar, Sterling and Euro were off by 0.5% and 0.3%, respectively, while the Yen was up 0.2%

Oil, gold, and silver see major increases

• Crude oil prices saw a significant 4.8% increase to $86.9 per barrel
• Spot gold prices rose 3.0%% to $1,844 per ounce, while silver rose 4.4% to $22.9 per ounce
• Grain and oilseed prices followed crude oil higher overnight, with follow-through buying seen after yesterday's soybean-led rally on the lower-than-expected corn and soybean yields from USDA

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]