Oct 23 (Reuters) - Markets are battening down the hatches. Political tensions intensified across the Middle East, Europe and the United States this week, as energy prices, French bond yields and election rancor rose.
Meanwhile, the beginning of the third-quarter tech earnings season highlighted growing anxieties about AI's return outlook - worries that even a potentially Elon-Musk-size merger couldn't quell.
Oil prices hovered above $110 a barrel throughout the week, even though the supply of crude exiting the Gulf remained near pre-war levels, with Brent crude on Friday trading at a new five-month peak of more than $114/bbl. This suggests traders may be bracing for another round of strikes in the Middle East.
And for good reason. Yemen's Iran-aligned Houthis struck Saudi Arabia yet again this week, including attacks on a civilian airport and oilfield, resulting in multiple deaths and injuries. Iran's Islamic Revolutionary Guard Corps also said that more tankers were hit by its forces in the Strait of Hormuz, and the US State Department has ordered some diplomats and family members to leave its missions in Saudi Arabia.
While President Trump has previously said he doesn't intend to strike Iran again before the US midterm elections on November 3, expectations are rising that another round of joint US-Israeli attacks could come soon after.
Meanwhile, Israelis will also go to the polls on Tuesday in the country's first election since the October 7, 2023 Hamas attacks, with the main blocs supporting and opposing Prime Minister Benjamin Netanyahu running very close in recent polls.
Back in the US, the ongoing Middle East conflict and its impact on fuel prices continue to weigh on Trump's approval rating ahead of the critical vote next month. It hit a record low of 31% in the latest Reuters/Ipsos opinion poll, with 68% of Americans reporting that they disapprove of Trump's handling of the economy, including 37% of self-identified Republicans.
It's therefore unsurprising that the administration is continuing to pull whatever levers it can to try to reduce energy prices. This has recently included loosening sanctions on Russia, which has drawn criticism from both sides of the aisle.
Diplomatic efforts are continuing. US envoy Steve Witkoff met with Russian President Vladimir Putin on Wednesday, after which the Russian leader agreed to resume US-mediated peace talks with Ukraine as soon as next month. But Russia has since continued to pound Ukraine with ballistic missiles, while Kyiv has sent hundreds of drones toward Moscow.
These developments come amid rising concerns in Ukraine that the US is distancing itself from Kyiv, a debate that has pulled in the world's richest man, Elon Musk.
Ukraine uses the Starlink satellite service of Musk's SpaceX for battlefield communications and drone operations. Kyiv claimed last week that the service had been restricted. The Wall Street Journal then reported on Tuesday that Musk had ordered the slowdown, though the service now appears to have been restored.
Amid all this, Musk's two companies, SpaceX and Tesla, both reported third-quarter earnings. The biggest headline came on Tuesday after the SpaceX results, when Musk said that a merger of the two companies would be "a good idea" and that both had formed special committees to discuss the matter.
SpaceX shares rose 8% in extended trading, which also likely reflected news that the company had posted its ?first profit as a public company. AI revenue surged by almost 10 times to over $7.5 billion, largely from renting out data-center capacity, potentially signalling that its heavy AI spending is starting to pay off.
In other earnings news, Meta reported higher-than-expected revenue after the close on Wednesday, while also unveiling a plan to issue non-voting stock, which appears designed to keep CEO Mark Zuckerberg in California. The state is voting on a wealth tax that could force the billionaire to sell a significant number of shares.
But the new shares would also be used to fund Meta's mounting AI capex bill. That announcement came as the company reported its first quarterly negative free cash flow in more than a decade.
Investors weren't pleased, sending Meta's shares down 7% on Thursday. This came amid a sharp tech sell-off that saw the Nasdaq drop 2.6%, its biggest daily decline since early June. Investors were in a decidedly risk-off mood, sending money flooding into US Treasuries. At one point, the benchmark 10-year Treasury yield fell more than 19 basis points before steadying on Friday morning around 4.97%.
Treasuries may also be benefiting from the ongoing flight from French bonds. While the violent protests that spread throughout French cities last weekend calmed after the government instituted a curfew and reinforced security operations, investors remained spooked. France's 10-year government bond yield scaled 5% on Wednesday, hitting its highest level since 2002, as the spread versus German Bunds widened to a 15-year high on Thursday.
Investors remain wary of the outcome of the heavily indebted country's presidential election next April. With far-right Marine Le Pen and far-left Jean-Luc Mélenchon leading in the French polls, sound fiscal reforms don't look particularly likely. France may not be in a debt crisis yet, but it could be running out of time to avoid one.
Finally, in emerging markets, Indonesia was hit hard this week following a warning last Friday from MSCI that the country could be kicked out of its global indexes. The country's equity market is the world's worst-performing so far this year.
Looking to next week, investor attention will turn toward DC as the Federal Reserve meets right before we get September PCE inflation data. Most anticipate that the central bank will hold rates steady on Wednesday.
The recent capital markets volatility has already tightened financial conditions, doing some of the Fed's job for it, though probably not enough to hold off a hike at year-end. Markets will be keen to get any signalling on that front.
Before you head off, take a look at some questions ROI columnists have recently been exploring:
o Could sterling be the dark horse FX winner this autumn?
o What are five AI anomalies to watch for this earnings season?
o How is AI fuelling global trade imbalances?
o Why are EM countries able to ignore Fed tightening?
o Why should the Global South's electric buildout worry fossil fuel companies?
o What new ventures are on the horizon at the London Metal Exchange?
o Why aren't money markets benefiting from higher rates?
o Where are the Asian stock winners beyond AI?
o How might El Nino impact Asian and European LNG imports?
o How is Trump's tariff war boosting coal usage in Vietnam?
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By Anna Szymanski
