Rate cuts and politics, say no more By Reuters

(Reuters) – A week ahead of U.S. inflation data, the start of third-quarter earnings, a French budget and possibly a big rate cut in New Zealand.

Investors are also on edge as tensions in the Middle East rise while Japan’s new prime minister, Shigeru Ishiba, is in the spotlight.

Here’s everything you need to know about the week ahead in global markets from Lewis Krauskopf in New York, Yoruk Bahceli in Amsterdam, Karin Strohecker and Amanda Cooper in London and Kevin Buckland in Tokyo.

1/ A YEAR OF WAR

A year on from Hamas’ October 7 attack on Israel, and the region appears on the brink of a full-scale war that could reshape the oil-rich Middle East.

The conflict, which has killed more than 42,000 people, the vast majority in Gaza, is expanding. Israeli troops are now in neighboring Lebanon, home of Iran-backed Hezbollah; Iran launched a large-scale missile attack on Israel earlier this week.

Global markets remained largely flat. Oil prices, the main avenue for tremors ahead, rose about 8 percent this week, but weak demand and ample global supply kept a lid on gains. A further escalation between Iran and Israel could change that, especially if Israel strikes Iran’s oil facilities, an option US President Joe Biden has said is under discussion.

The scars of the conflict are visible on Israel’s economy, which has suffered a series of sovereign demotions and seen insurance defaults rise and bonds slide.

2/ BUSY TIMES

US third-quarter earnings season is about to begin, testing a stock market near record highs and trading at elevated valuations.

JPMorgan Chase (NYSE: ), Wells Fargo and BlackRock (NYSE: ) report on Friday. Other early week performers include PepsiCo (NASDAQ: ) and Delta Air Lines (NYSE: ) . Overall, companies are expected to have increased third-quarter earnings by 5.3 percent from a year earlier, according to LSEG IBES.

Meanwhile, Thursday’s US consumer price index for September will be closely watched for signs that inflation is moderating.

Investors are already anticipating significant interest rate cuts after the Federal Reserve began its easing cycle last month.

Elsewhere, investors will try to gauge the economic fallout from a dock strike as ports on the US East Coast and Gulf Coast reopened on Thursday.

3/ A SHOCK

France’s new government presents its long-awaited budget to parliament on Thursday. It plans a €60bn belt-tightening drive, around 2% of GDP, next year.

It believes spending cuts and tax increases should bring the deficit, seen rising to 6.1% this year in the latest upward revision, to 5% by the end of 2025. The target date for reaching the 3% deficit limit of the euro area is also pushed back to 2029 from 2027.

This is bad news just ahead of the rating reviews that will begin with Fitch next Friday.

Markets are not impressed. After narrowing slightly, the additional premium paid by France on its 10-year debt to Germany rose to just below 80 bps, close to its August high.

Ultimately, what may matter more is whether Prime Minister Michel Barnier can pass the budget, given a divided parliament that has investors wondering how long his government will last.

4/ SHEEP SYMPATHY

A reluctant ally of global easing, the Reserve Bank of New Zealand is quickly catching up.

It meets on October 9 and traders believe the central bank could follow the Fed’s lead and cut rates by half a point.

The RBNZ cut rates by 25bps to 5.25% in August, a year ahead of its own projections.

Markets price in a decline below 3% by the end of 2025. That will still be above where traders think US and eurozone rates will be.

Shorter-term investors are neutral on , but hedge funds have benefited this year.

Positioning and potentially higher rates than others could isolate New Zealand’s currency. So could the return of so-called carry trades, and in this case essentially a bearish bet on the yen in favor of those climbing high-yielders such as kiwis.

5/ POSITIONING AT THE SURVEY

When Shigeru Ishiba surprised the markets by winning the contest to become Japan’s prime minister, investors rushed to reposition themselves for higher interest rates.

A week later, the landscape looks different as Ishiba backed off not just on monetary policy, but also on previously market-unfriendly support for higher taxes on profits and capital gains.

Perhaps it’s no surprise that a hawk would hide his claws with a snap election on October 27.

Even so, Ishiba was unfailingly blunt, saying after a meeting with the Bank of Japan – whose independence Ishiba has pledged to honor – that the economy was not ready for further interest rate hikes.

The yen, which rose, passed 147 to a six-week low by Thursday. Japanese stocks rebounded from their steepest decline since early August.

Check back in a month for any other policy flip flops.

(Graphics by Kripa Jayaram, Pasit Kongkunakornkul, Vineet Sachdev; Compiled by Dhara Ranasinghe; Editing by Sonali Paul)