Oil rebounds ahead of Fed decision

Oil rebounds ahead of Fed decision
(Cash-market closes are for Tuesday, 27 October, US Eastern time; futures, European-market and commodity quotes were verified through approved sources before 16:30 Hong Kong time on 28 October; precise 16:30 quotes for US stock-index futures and the pan-European STOXX during trading were not available from approved sources for this edition.)

On Tuesday, the S&P 500 rose 0.60% to 7722.60 points, the Dow rose 0.03% to 52377.57 points, the Nasdaq rose 1.18% to 26477.81 points, and the equal-weight S&P ETF (RSP) rose about 0.11% to 217.52 dollars (Reuters) (RSP closing data). The 10-year US Treasury yield closed near 4.99% on Tuesday and rose further before the market opened Wednesday; Brent crude rose about 1.9% to 116.03 dollars a barrel on Wednesday, while WTI rose about 2% to 101.91 dollars a barrel (The Wall Street Journal); gold futures rose about 0.9% on Tuesday to 4075 dollars an ounce; and the dollar index rose about 0.3% on Tuesday to 102.29, strengthening further before the market opened Wednesday (Reuters) (Dow Jones, as reported by another outlet).

Market themes
At midday Wednesday, markets were “waiting for two answers and bearing one variable”: waiting for the FOMC decision and Warsh’s remarks in the early hours tonight, and for Microsoft and Alphabet’s earnings after tonight’s close, while oil is the uninvited variable. Oil had just fallen 1.7% on Tuesday, giving markets some relief, when Wednesday’s news that the Houthis claimed to have attacked Saudi Arabia’s largest refinery pushed Brent back above 116 dollars. On the same day, Asian chip stocks surged on SK hynix’s record earnings, while European stock-index futures opted to fall first. The rise is in “AI orders”; the decline reflects “caution about adding positions before the decision”; and every 1-dollar rise in oil adds another inflation question to tonight’s FOMC test.

I. Oil and the Middle East: Tuesday’s relief gives way on Wednesday to a return to 116 dollars amid reports of a refinery attack

• Reuters reported Wednesday that the Houthis said Tuesday they had attacked Saudi Arabia’s largest refinery with missiles. Brent rose at one point by 1.48 dollars to 115.36 dollars, and WTI rose 1.22 dollars to 101.12 dollars; Saudi authorities did not immediately confirm the attack on the facility, which processes 550 thousand barrels a day (Reuters). The Wall Street Journal’s Wednesday intraday quotes were higher: December Brent rose 1.9% to 116.03 dollars, and December WTI rose 2% to 101.91 dollars. It also said the Saudi-led coalition reported intercepting three ballistic missiles and four drones headed toward the Eastern Province (The Wall Street Journal). Tuesday’s pullback reflected “hopes for negotiations”; Wednesday’s rebound reflected “news on the ground” — the market now believes attacks and interceptions, not the negotiating table.
• A longer-range variable also came to the fore on the same day: The Wall Street Journal reported that the US had told several Gulf Arab states to prepare for a “short and intense” military operation after the midterm elections. Trump has yet to make a final decision but is leaning toward large-scale strikes on Iran after the elections; the US military is sending an additional Patriot system to Israel and withdrawing some troops from vulnerable bases (The Wall Street Journal). Reuters also noted that seven OPEC+ oil producers were expected on Sunday to leave their December production target unchanged (Reuters). An unchanged production target cannot rescue oil prices, because the market is pricing “whether fighting will start after the elections,” not production. As long as that possibility remains on the table, the oil-price premium will persist.
• Israel’s election delivered a “result without a result”: exit polls showed Netanyahu’s camp and Eisenkot’s camp deadlocked at 51 to 51 or 52 to 49, with neither side securing the 61 seats needed for a majority. Netanyahu called for a “strong right-wing national government,” while Eisenkot said voters had rejected Netanyahu staying in office (Reuters). The election deadlock means Netanyahu could remain as caretaker and coalition talks could drag on for weeks. Tonight, markets are still trading oil and the FOMC, not the vote count in Jerusalem.

II. European markets and the UK budget: futures fall first, Deutsche Bank beats expectations, Equinor profit doubles

• Europe showed caution before Wednesday’s open: the Dow Jones morning briefing said European stock-index futures were lower as investors waited ahead of the Fed decision and looked to the UK budget for assurances of fiscal discipline; the dollar strengthened, gold fell, oil rose and US Treasury yields climbed (Dow Jones, as reported by another outlet). Europe’s decline today is not about earnings but about “reluctance to act on the eve of the decision.” The STOXX 600 had just risen 0.47% to 643.68 points on Tuesday, and Wednesday’s futures have already given back half that breath.
• Wednesday brought two heavyweight European earnings reports: Deutsche Bank’s third-quarter net profit attributable to shareholders was 1.588 billion euros, up 2% year on year and above the analysts’ average forecast of 1.444 billion euros. Strength in retail and corporate banking offset lower investment-banking revenue, and the bank raised its full-year revenue guidance to more than 33 billion euros (Reuters). Norway’s Equinor reported third-quarter adjusted pretax profit of 12.34 billion dollars, almost double the 6.22 billion dollars of a year earlier and slightly above the 12.19 billion dollars forecast by analysts. It also raised its full-year production growth forecast from 3% to about 4% (Reuters). Deutsche Bank’s story is that “banks can still make money”; Equinor’s is that “oil prices mean profit.” On the same day, the winners in European earnings happen to be on the side of oil prices.
• The UK budget is Europe’s second test today: the Dow Jones morning briefing listed the UK budget statement among the day’s focal points and said markets wanted the government to demonstrate fiscal discipline after global bond yields rose on debt concerns (Dow Jones, as reported by another outlet). The budget itself will not determine tonight’s US stock-market open, but it will determine whether European bond markets add complications for the FOMC tonight: the weaker the signal of fiscal discipline, the greater the upward pressure on global yields.

III. Bonds, the dollar and commodities: the 10-year yield is stuck above 5%; oil rises, gold falls and the dollar strengthens

• Wednesday’s combination is a notch “tighter” than Tuesday’s: yields are higher, the dollar is stronger, gold is lower and oil is higher — all four point to “inflation expectations still refusing to ease.” The Dow Jones morning briefing said US Treasury yields and the dollar were rising, gold was falling and oil was rising. Markets broadly expected the Fed to hold steady, but were watching closely for whether hawkish inflation signals from Warsh would reset the rate path (Dow Jones, as reported by another outlet). Tuesday’s backdrop was a 10-year yield closing near 4.99%, the dollar rising for a third straight day to 102.29, and gold futures rising about 0.9% to 4075 dollars (Reuters). Gold rose Tuesday because oil fell; gold fell Wednesday because oil rose. In this round, gold is trading as oil’s shadow, not as a haven.
• The scale of rate expectations has not changed: a Fed hold this week is nearly consensus, and the real question remains whether the statement and press conference will open or narrow the door to a December rate hike. Reuters’ Wednesday European-market roundup noted that rising bond yields for AI cloud providers such as CoreWeave and record costs to insure Meta debt had amplified concerns about how AI infrastructure is financed, particularly with US rates potentially rising further (Reuters). The reason the bond market is stuck above 5% is the same as Tuesday: no one wants to act first on the eve of the decision. Wednesday’s oil price has simply raised the cost of standing still by a notch.

IV. Individual stocks and sector moves, including earnings: Tuesday’s chip rally sets the backdrop; European banks and energy report Wednesday

• First, a recap of Tuesday’s backdrop: 6 of the S&P’s 11 sectors rose and 5 fell. Technology led with a gain of about 1.5%, while energy lagged with a drop of about 2%; the Philadelphia Semiconductor Index rose 3.6%, with all 30 constituents higher, and Dell and Super Micro Computer each rose about 7.5%. Boeing plunged 10.69% to 168.18 dollars because it will miss its full-year target of delivering 500 737 Max aircraft (Reuters). Tuesday’s marking scheme was already clear: reward “AI hardware,” punish “another delay to the delivery timetable.” On Wednesday, Europe’s Deutsche Bank and Equinor happened to submit their papers under the same standard: one beat expectations, the other benefited from oil prices.
• Individual European stocks also diverged Wednesday: Deutsche Bank was tipped to open about 2% higher after its results, while Equinor’s shares had risen 86% year to date, outperforming the 43% gain in European energy stocks. That reflected its position as a European oil and gas supplier with no direct Middle East exposure (Reuters) (Reuters). One bank stock relies on “retail and corporate banking” to withstand the investment-banking decline; one energy stock relies on “oil prices” to withstand everything. Europe has no systemic story today, only individual stocks making their own calculations.

V. AI highlights: SK hynix’s record ignites Asian chip stocks; Microsoft and Alphabet face the monetisation test tonight

• SK hynix lit the fire under Asian chip stocks Wednesday: Reuters’ European-market roundup said SK hynix announced approximately 75 billion dollars in shareholder returns after its quarterly profit rose more than sevenfold, as AI infrastructure continued to drive up memory-chip prices. This supported Asian equities, with attention now turning to whether Alphabet and Microsoft’s results can sustain the momentum (Reuters). Record memory-chip profits prove that “AI orders are still paying” — but they cannot prove that cloud providers’ revenue can cover their bills. That is tonight’s test.
• The same Reuters roundup highlighted the other side of tonight’s test: investors are demanding evidence that the AI boom can deliver returns quickly enough to justify its huge price tag. Rising CoreWeave bond yields and record costs to insure Meta debt have amplified concerns about how AI infrastructure is financed (Reuters). Tuesday’s backdrop still applies: Microsoft, Alphabet and Amazon have a combined order backlog of nearly 1.7 trillion dollars and plan capital expenditure of up to 600 billion dollars this year, but investor tolerance for “spending eroding free cash flow” is declining (Reuters). Strong AI demand alone is no longer enough; the market wants evidence of monetisation, margins and cash flow. Microsoft and Alphabet’s earnings after tonight’s close are the second formal test of that proposition.

VI. Forward calendar (Hong Kong time)

• 28 October (Wednesday) tonight: UK budget released; no major earnings before the US open; Microsoft and Alphabet report after the close.
• 29 October (Thursday), 02:00: FOMC decision (markets expect a hold at 3.75–4.00%; no dot plot this round; a hold this week is nearly consensus, while the probability of a December hike remains high); 02:30 Fed Chair Warsh’s press conference.
• 29 October (Thursday): 20:30 preliminary Q3 GDP (market forecast of 3.2% annualised growth, above the previous 2.2%) and September PCE; 21:15 ECB rate decision; Eli Lilly and Mastercard before the open; Amazon and Intel after the close.
• 30 October (Friday): Bank of Japan decision; 20:30 employment cost index (market forecast 0.8%, below the previous 0.9%); Exxon Mobil and Chevron before the open; seven OPEC+ oil producers meet Sunday to assess production policy (Reuters expects the December target to remain unchanged).
• 31 October (Saturday): another protest in France (called by unions and the Yellow Vests); 3 November (Tuesday): US midterm elections; 5 November (Thursday): major French union strike.