Markets Rebound Despite Israel's Gaza Incursion; Earnings Updates and Central Bank Decisions in Focus | Daily Market Analysis

Key events:

• China - Manufacturing PMI (Oct)
• Eurozone - CPI (YoY) (Oct)
• USA - CB Consumer Confidence (Oct)

Despite Israel's initial steps into Gaza, European markets have had a positive start to the week. The limited and gradual nature of these actions seems to be easing concerns about potential escalations leading to a new front opening on Israel's northern border with Lebanon and Hezbollah.

In the FTSE100, the primary drags have been in the energy sector due to falling oil prices. Additionally, there might be some profit-taking on BP and Shell in anticipation of their Q3 earnings reports later this week. The banking sector continues to face challenges due to concerns about weakening net interest margins and a challenging economic outlook.

In the US markets, we are seeing a more optimistic tone, with stocks opening higher and rebounding from five-month lows. This comes as investors aim to put two consecutive weeks of declines behind them.

The S&P 500 benchmark rebounded, closing with a gain of 1.2% after recently entering correction territory. Simultaneously, the Dow Jones Industrial Average surged by over 1.6%, equivalent to more than 500 points, following a 1.2% decline in its previous close.

In contrast, the Nasdaq Composite, which experienced a lackluster week due to a mixed performance in Big Tech earnings, managed to finish the day with an approximate 1.2% increase.

On the earnings front, McDonald's has reported Q3 revenues of $6.69 billion, with the US business outperforming with an 8.1% increase in like-for-like sales. Profits have also exceeded expectations, coming in at 3.19 cents per share. The company has announced a 10% increase in its quarterly dividend to $1.67.

In contrast, Tesla shares appear vulnerable as they broke below their long-term uptrend in mid-October, slipped below their 200-day SMA last week, and are now trading at their lowest levels since June 1st, below $200.

The Bank of Japan decided to maintain ultra-low interest rates on Tuesday and made slight adjustments to its rhetoric around the yield curve control (YCC) policy. The bank has also forecasted higher inflation levels in the coming years. This decision caused the yen to slide 0.5% as it briefly crossed the 150 level against the dollar, disappointing market participants who were hoping for a more hawkish move. Benchmark 10-year yields on Japanese government bonds eased some of their gains after the decision, moving further below the 1% ceiling.

Gold prices have traded lower this week as market attention has shifted toward the Federal Reserve's decision on interest rates, scheduled for this Wednesday. While the central bank is expected to keep its benchmark rate unchanged, it is also likely to reaffirm its stance of keeping rates higher for an extended period due to recent signs of persistent US inflation and economic resilience.

This scenario is expected to limit significant upside for gold, as higher rates increase the opportunity cost of purchasing bullion. This trend has weighed on gold prices throughout the past year, preventing any sustained moves toward the $2,000-an-ounce level.

Nevertheless, the ongoing Israel-Hamas conflict has fueled safe-haven demand, leading to a 6% to 8% increase in gold prices in October, marking the best monthly gain since March. Overall, gold has seen an impressive nearly 10% rise in value in 2023.

The Australian dollar has emerged as the strongest performer, driven by the unexpected resilience of September retail sales, which increased by 0.9%. This result comfortably surpassed expectations of 0.3%, and the August figures were also revised upward from 0.2% to 0.3%. This unforeseen strength in economic performance has prompted some short-covering activity in anticipation of the Reserve Bank of Australia's (RBA) rate meeting next week. Market participants are now reassessing the likelihood of a rate hike in the near future.