MARKETS RISE BUT INVESTORS REMAIN CAUTIOUS AS WAR BREAKS OUT IN THE MIDDLE EAST

MARKETS RISE BUT INVESTORS REMAIN CAUTIOUS AS WAR BREAKS OUT IN THE MIDDLE EAST

This week began with news of war between Israel and Gaza following the terror attacks by Hamas last weekend. It might seem inappropriate to comment in a markets newsletter, however, it is important to mark these events. The brutality of the assaults on mainly civilian targets have generated sympathy and horror in most observers. In addition, the nature of these attacks will shape Israel’s response. The conflict with Hamas- controlled Gaza appears to be far greater in scale than previous conflicts. The confrontation is so far limited in scope but the potential to draw in other countries means this could quickly spiral and markets remain wary of the fallout.

Although the market reaction to the outbreak of war was muted, equity and bond markets rallied after the Federal Reserve appeared more cautious about future rate decisions. The Fed said the risk from high rates is now two sided and the need to tackle inflation must be balanced against the need to protect growth. After several negative weeks the watering down of the higher for longer message was well received.

US: LESS AGGRESSIVE TONE FROM THE FED LIFTS BONDS AND EQUITIES

US Treasuries led a global rally in government bonds as the Federal Reserve gave a strong indication that it will leave rates unchanged at the next interest rate meeting. The minutes from the last Fed’s interest rate meeting show members have become more cautious about future rate hikes. US government bonds rallied at the start of the week as the outbreak of war between Israel and Gaza caused some investors to seek haven assets. However, the potential that US rates have already peaked sparked a rally in government bonds around the world. Yields, which move in the opposite direction to bond prices, fell sharply in developed and emerging market soveriegn bonds.

Global equities have also rallied strongly due to optimism that this week’s US inflation update would give the Fed more room to keep interest rates on hold. However, the less aggressive approach from the US Fed saw the US dollar weaken slightly after its strong rise in recent weeks.

ISRAEL: WAR WITH HAMAS PUSHES INVESTORS TOWARDS HAVEN ASSETS

The outbreak of war between Israel and Hamas fighters in Gaza caused some nervousness in financial markets. The brutal attack on Israel has provoked a stern response as a new Israeli unity government declared war and vowed to force Hamas out of Gaza. The conflict is the fourth war since Hamas took control of Gaza in 2007, but Hamas’ attack on Israel and the promised retaliation are of a larger scale than the previous conflicts.

The outbreak of fighting initially pushed up the price of oil and gas, and contributed to the rise in haven assets like gold, the US dollar and US government bonds at the start of the week. However, investor sentiment appears to have calmed and oil and the US dollar fell later in the week. The potential for the conflict to expand and draw in other countries means there is still some uncertainty in markets and as gold and US Treasuries have held on to their gains.

EQUITIES: RECRUITMENT FIRMS FEEL THE EFFECT OF COOLER JOBS MARKET

The UK’s jobs market is showing further signs of weakening as recruiters PageGroup, Hays and Robert Walters all said earnings fell in the last quarter as companies become more cautious about hiring new staff. PageGroup said full year profits are expected to be slightly below its previous forecast. Robert Walters, which concentrates on professional roles, said its revenues are down 13% as candidates become more cautious about moving to a new employer. All three recruiters reported that employers are increasingly choosing to take on temporary staff due to the uncertain outlook.

Meanwhile, KPMG and the Recruitment and Employment Confederation said wages for new hires and for temporary staff are rising at the slowest rate in more than two years. Recruitment firms reaped the benefit of employers competing for staff in the post-pandemic recovery. Shares in the UK’s listed recruiters comfortably outperformed in 2021 and parts of 2022 but they have struggled for much of this year.