The market attention has shifted once again from inflation and unemployment to oil and China. Due to the conflict in the Middle East and its potential escalation, where Israel has mentioned the possibility of targeting Iranian oil refineries, as well as nuclear facilities, oil has spiked and is on its way to the levels we saw during the summer. As you can see below, the U.S. 10 year yield is highly correlated to Brent, which tells us that if it were to be maintained, we could see yields close to 5%. Regarding China, after a holiday week, the Shanghai composite index jumped strongly at the beggining of the session only to settle at a gain of 4.6% due to lack of clarity from officials about the amount and timing of the stimulus package. The Hang Seng index in Hong Kong tumbled 9.4%, which in turn affected the luxury stocks in Europe, highly dependent of Chinese consumption. Developed markets are now more dependent on exogenous shocks than internal factors.
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