The main event in the financial sector last week was the drop in 10-year US Treasury yields, which fell beneath the important mark of 5 percent.
This decrease appears to have been driven by investors seeking safer investment opportunities to adjust their portfolios.
However, clear evidence suggesting a favourable shift in market conditions remains difficult to prove.
Geopolitical instability, particularly the escalating tensions in the Middle East, has contributed to market instability.
Additionally, a late spike in Brent crude oil prices, which briefly exceeded $117 per barrel, settled at approximately $116.75 by Friday’s close.
The equity market reflects this volatility, particularly within the technology sector, which has faced challenges related to financing and profit expectations.
Elevated borrowing costs continue to burden businesses, and the US housing market is struggling under the weight of increased mortgage rates. Consequently, these factors have kept the inflation rate above the targeted 2 percent.
A key question arises regarding the reasons for the decline in US 10-year yields. Is this decline a reflection of concerns related to growth, inflation, or a shift towards safe-haven assets?
Two main factors contributing to this situation are geopolitical uncertainties and increasing oil prices, which hinder economic activity, and escalate the inflationary pressures.
These circumstances might be driving investors to look for the security offered by US Treasuries, thus reaffirming their status as safe-haven investments compared to other risk assets.
Conversely, the rise in oil prices is contributing to inflationary pressures, which, in turn, is affecting Treasury yields.
The Federal Open Market Committee (FOMC) is scheduled to convene on October 27-28 to decide on interest rates, with approximately 90% of market participants anticipating no changes in monetary policy.
It is noteworthy that in past, Federal Reserve Chairman Warsh refrained from providing forward guidance, focusing instead on price stability without indicating potential rate hikes.
The absence of a comprehensive summary of US economic projections means that his tone during press conferences, particularly his choice of language, will be critical.
However, the increase in oil prices, which has inflationary implications, poses challenges for Federal Reserve policymakers, making them hesitant to signal a rate cut that could disrupt market stability. Should the Fed indicate a potential for another rate increase or suggest the necessity for further data before making decisions, such statements are likely to be regarded as hawkish by the market.
The Fed understands that any such announcement could result in a rise in US Treasury yields and bolster the US dollar.
Notably, Treasury yields experienced a significant rise on Thursday and continued to increase sharply by Friday’s close before easing a bit.
It will be essential to monitor whether yields comfortably surpass the 5 percent mark.
This week, market volatility is expected to remain elevated, influenced by geopolitical developments and the FOMC meeting.
Although US bonds are currently in the spotlight, the rising oil prices are failing to bolster gold’s status as a safe haven, a trend previously noted due to ongoing liquidity issues in the US dollar market.
The increase in oil prices is partly fuelled by renewed fears of US-Israel military action against Iran. Iran has also issued threats to disrupt shipping in the Strait of Hormuz and regional energy infrastructure, which could significantly harm the global economy in the event of supply disruptions.
The International Energy Agency (IEA) has already cautioned that any attacks or interruptions in physical supplies could have widespread repercussions.
The Federal Reserve’s research has indicated that supply shocks can compromise the conventional safe-haven behaviour of US government bonds when investors anticipate further tightening by central banks.
This raises the question of whether, in such scenarios, investors would turn to gold as an alternative safe haven. However, should the US dollar and Treasury yields increase gold prices are likely to decline.
A favourable scenario for gold would involve a retreat in oil prices alongside a decrease in US bond yields.
However, if the DXY index and US Treasury yields strengthen while oil approaches $120 per barrel, this would have negative implications for gold. Should oil prices decline today (Monday) while the DXY and US bond yields weaken, it may temporarily support gold. However, this outcome appears unlikely.
Although a statement from the Federal Reserve is not expected to provide significant relief for gold, a balanced message aimed at stabilizing the financial sector could offer some temporary support to gold prices.
In the meantime, Europe is experiencing significant stress due to protests and uncertainty throughout the region.
The situation has been worsened by increasing prices of natural gas and oil.
The unrest, particularly centered in France, has led to a weakened European currency and increased pressure on prices, contributing to rising inflation. The European Central Bank is anticipated to raise interest rates, while the euro is facing pressure and performing poorly.
The US dollar and the British pound are strengthening against it.
In comparison, the United States is less vulnerable to fluctuations in energy prices, which bolsters the USD, although the US economy is grappling with various other challenges.
The UK is dealing with elevated inflation but is relatively protected from energy price volatility. Positive business sentiment is providing support, allowing the pound to gain strength against the euro and somewhat against the US dollar.
Japan is significantly impacted by soaring oil prices, but currently, US bond yields correction and the potential for intervention by the Bank of Japan have provided some support for the Japanese yen. However, the currency’s future trajectory will ultimately depend on the Federal Reserve’s decisions and the actions of the US dollar.
WEEKLY OUTLOOK - Oct 26-30
#GOLD @ $3995.50- Gold is likely to face continued pressure this week unless it exceeds $4098, allowing it to reach $4150. On the downside, support is at $3902 and then at $3775.
#EURO @ 1.1203 - The euro is facing pressure and is anticipated to hold a level of 1.1298. If it fails to do so, it may rise to 1.1330. On the flip side, it must drop below the support level of 1.1075 to reach 1.1040. Otherwise, it will likely remain within its current range.
#GBP @ 1.3377- it has strong support at 1.3250, which should hold. But 1.3470 will be tough to crack.
#JPY @ 156.84- The $/JPY pair has risen in favour of the JPY. However, 155.10 should be a support level that should hold for 157.50 or 158.30.
Copyright Business Recorder, 2026
The writer is former Country Treasurer of Chase Manhattan Bank. The views expressed in this article are not necessarily those of the newspaper
He tweets @asadcmka
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