Rate Cuts and Politics: No Further Commentary Needed – Reuters

Global Market Outlook: Upcoming Economic Events and Political Developments

As we look ahead to a significant week in financial markets, key events include U.S. inflation data, the start of third-quarter earnings, a budget plan from France, and possibly a major interest rate cut from New Zealand. Investor sentiment is also tense due to escalating tensions in the Middle East and the spotlight on Japan’s new Prime Minister, Shigeru Ishiba.

Here are the critical developments to keep an eye on in the coming days:

1. Escalating Conflict in the Middle East

One year after Hamas’s attack on Israel, the region is teetering on the brink of a broader war that could reshape the oil-rich Middle East. The ongoing conflict has claimed over 42,000 lives, predominantly in Gaza, and has escalated with Israeli troops now engaged in Lebanon, where Iran-backed Hezbollah operates. Iran also recently executed a significant missile attack on Israel.

Despite these tensions, global markets have shown resilience. Oil prices surged approximately 8% last week, although weak demand and abundant supply have tempered further increases. A significant escalation in hostilities between Iran and Israel, such as an attack on Iranian oil facilities—a topic reportedly under discussion by U.S. President Joe Biden—could alter market dynamics.

The impact of the conflict is evident on Israel’s economy, which is facing several sovereign credit downgrades, increased default insurance costs, and declining bond values.

1. U.S. Earnings Season and Economic Insights

The third-quarter earnings season for U.S. companies is set to commence, presenting a critical examination of a stock market that is nearing all-time highs and trading at high valuations. Major companies slated to report earnings include JPMorgan Chase, Wells Fargo, and BlackRock, among others. Early reports from companies like PepsiCo and Delta Air Lines will also provide insights into economic trends.

Additionally, Thursday’s release of the U.S. consumer price index is anticipated for indications of moderating inflation. Strong job data could influence the Federal Reserve’s decision-making regarding rate cuts, following its recent easing cycle.

Investors will also analyze the economic repercussions of a dockworker strike, which concluded recently after East Coast and Gulf Coast ports reopened.

1. France’s Budget and Political Challenges

France’s government will unveil its highly anticipated budget proposal to Parliament on Thursday, aiming for a €60 billion austerity strategy, roughly 2% of GDP. The government’s goal is to reduce the deficit—projected to reach 6.1% this year—to 5% by the end of 2025. Consequently, the timeline for achieving the eurozone’s 3% deficit target has been extended to 2029.

Investor sentiment regarding France’s fiscal situation remains sour, as evidenced by the widening gap between French 10-year debt yields and those of Germany, nearing levels last seen in August. The stability of Prime Minister Michel Barnier’s government is also in question following a no-confidence motion filed by left-wing lawmakers.

1. New Zealand’s Rate Decisions

New Zealand’s Reserve Bank is set to meet on Wednesday, with expectations of a potential half-point interest rate cut, following a previous 25 basis point reduction to 5.25%. Traders anticipate interest rates could dip below 3% by the end of 2025, although this would still exceed projections for U.S. and eurozone rates.

While short-term investors maintain a neutral stance towards the Kiwi, hedge funds have shown increased interest in the currency this year. Factors including positioning and comparatively higher rates may provide some support for the New Zealand dollar, particularly against other currencies like the yen.

1. Shifts in Japanese Economic Policy

Following Shigeru Ishiba’s unexpected ascent to Prime Minister, markets quickly adjusted to the possibility of higher interest rates. However, just a week later, Ishiba has backtracked on his monetary policy stance and previous support for corporate and capital gains tax increases—likely a strategic move ahead of an impending snap election.

Despite his assurances regarding the Bank of Japan’s independence, Ishiba indicated that the economy is not prepared for further rate hikes. The yen, which had recently been gaining strength, fell past the 149 mark to a seven-week low. Meanwhile, Japanese stocks rebounded from recent declines.

These evolving dynamics warrant close attention, particularly as Japan approaches its elections, which may further influence economic policy and market conditions.