Global Macro Recap: Geopolitical Tensions Dominate Markets - Last Friday

Potential for near-term escalation in geopolitical tensions in the Middle East dictated trends across macro markets into the weekend and overshadowed a solid start to large cap US bank earnings and an unexpected rise in preliminary October University of Michigan inflation expectations.

In the flight-to-quality-induced rally, the UST curve bull-flattened as the long end (30y: 4.75%, -10.1bp) outperformed, which reversed the prior session's sharp intrasession steepening. Amidst the decline in US real yields (10y TIPS: 2.27%, -7.9bp), the US dollar's strength was capped as the DXY USD Index (+0.1%) closed little changed. Once again, this left CHF to be the preferred G10 safe-haven currency expression and EUR/CHF (-0.9%) closed at 0.9482, an all-time low. CAD (+0.2%) showed modest strength alongside the surge in Brent crude oil futures (+5.7%), just shy of $91/bbl. Tellingly, US equity declines were led by the Nasdaq 100 (-1.24%), despite the move lower in UST yields, as stocks (S&P 500: -0.50%) finally traded in a more traditional risk-off manner considering the heightened geopolitical tensions.

Macro markets were forced to navigate an escalation in geopolitical tensions this week, but risk assets fared better than expected as broad declines in global sovereign bond yields initially assuaged some of the pressure higher discount rates had recently applied to global equity prices. The rise in long-end US Treasury yields finally abated as a flight-to-quality-induced rally allowed USTs to display safe-haven characteristics and the curve to bull-flatten. A repricing lower in US real yields weighed on the US dollar, which left CHF as the preferred G10 safe-haven currency for flight-to-quality expressions.

Validation of two market perceptions: (1) concern about entrenched services inflation; and (2) concern about larger Treasury supply returned in vigor this week. A rebound in shelter inflation during September led to repricing higher of the Fed policy rate path in 2024, while the $20bn 30y reopening auction produced a 3.7bp tail, the second largest since 2011.

Amid continued increases in MMF AUM and $1.151tn at the Fed's ON RRP facility, Treasury continued with increases to T-bill auction sizes despite the TGA ~$700bn, and quickly approaching its year-end target of $750bn. These actions, in consideration with the rise in term premia in the long end, raises the probability for coupon sizes in the long end either to be raised more modestly at November Treasury refunding, or perhaps left unchanged.