Economic and market landscape in the first week of October

During the National Day holiday in China in the first week of Oct, the market usually changes heavily. During the holiday this year, crude oil, commodity market as well as bond market slumped, dampening market sentiment. Then, what happened?

1. US Treasury bond yield surged.

On Oct 6, 30-year US Treasury bond yield rate rose to 5.04%, and 10-year Treasury bond yield rate exceeded 4.88%, new high since 2007.

On Sep 30, US government shutdown was averted, however, McCarthy was voted out, reflecting House chaos.

From the perspective of financial market, on the one hand, employment data remained high, leading to expectation of interest rate hike; on the other hand, due to the concerns about financial deficit and interest rate hike prospect, debt market saw continuous selloffs. And as a result, US bond yield kept rising.

The expectation of rising interest rate would cause higher financing cost, which could bring adverse impact on financial system as well as entity economy.

US Fed recorded losses over 57.3 billion US dollars, let alone the losses for financial institutes such as banks due to the reduced valuation of securities. As for banks, there's Fed's emergency Liquidity program, while financial market would continue to be affected by the negative impact.

When we take a look at the rounds of oil price slumps this year, it can be found that they occurred in sync with the outbreaks of bank risks, and the fundamental cause was rising interest rate.

2. Crude oil price plunged.

When US Treasury bond yield rose, crude oil slumped in the first week of Oct. On Oct, WTI crude oil futures closed at $82.79/bbl, down by more than $8/bbl or 8.8% from Sep 28.

The decline in oil price can be attributed to several reason.

Firstly, according to EIA data, though US crude oil stocks remained low, gasoline stock increase exceeded expectation. EIA gasoline demand hit new seasonally low since 1998, and refining profits were weak recently, exacerbating the concerns about demand.

Secondly, crude oil could be volatile due to large long positions.

Thirdly, players were concerned about rumors about negotiations for political agreement between Saudi Arabia and U.S.

Fourthly, financial market and commodity market declined simultaneously. And concerns about systematic risk caused the drop in crude oil and commodity price.

In a conclusion, though crude oil supply is expected to be tight in the fourth quarter of 2023, it could be short-lived and it may get relived in 2024. And there could be uncertainty from the side of oil producing countries. It should be watched closely that the base of economy is weak and high oil price could bring negative impact on demand.

However, there could still be some changes due to complex supply and demand, as well as shifting sentiment and risk. With the cost drifting lower after the holiday, China domestic market could get affected and any change in demand and orders in Oct should be noted.