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October Market Minute

Hamas terrorists attacked Israel from Gaza on October 7 and slaughtered an estimated 1400 men, women, and children; this inhuman act dramatically worsened the global geopolitical environment already badly damaged as a result of the February 24, 2022, Russian invasion of Ukraine. Trading on October 6 around $1832 gold closed on October 20 around $1980, for a gain of about $170. This rise is less than the typical 10% witnessed with previous, major geopolitical shocks (the Russian invasion bumped gold by 14% or so), but this latest crisis is only just beginning to unfold, we think. Silver increased by $2.20 a rise of 10% since the October 7 attack.

US Government Eleventh-hour Deal

The US government pulled off a last-minute deal to advert a government shutdown on Oct 1. The eleventh-hour deal passed by the House, Senate and signed into law by President Biden will extend funding through mid-November. This is the second time this year that Congress has adverted a shutdown at the last minute with temporary funding measures. And mid-November could bring another round of tension as Congress hammers our extending government funding to advert another threat of a shutdown.

Monetary Policy

Investors are concerned that the Fed (and other central banks) will raise rates further and will hold rates higher-for-longer, especially if the labour remains robust. Although the Fed held the federal funds rate at the current range of 5.25% to 5.50% at its September 19-20 meeting the projections released with the statement showed that 12 of 19 committee members project one more interest rate increase this year. Committee members also projected interest rates to remain higher in 2024 and 2025 than they had previously. The committee raised its median projection for the fed funds rate at the end of 2024 to 5.1% from 4.6% and for the end of 2025 to 3.9% from 3.4%. In other words, the Fed is now projecting higher rates for longer. Our view is that equity markets are likely to continue to face headwinds over the next several months as economic, monetary policy, and geopolitical events unfold.

The Bank of Canada held rates at 5% at its October 25 meeting, but are reluctant to say that the hiking cycle is officially over because of uncertainty about the path of inflation.

Our baseline forecast is for both the BoC and Fed to hold target rates until year-end and then start to lower rates next year to combat slowing economic growth. Our view hasn’t changed from last month that the effects from the higher rates have not fully worked through the economy and that a recession is still a high probability.

Canada Outlook Dashboard

Bonus Tip:

Gold and Silver have historically served as a safe haven asset during times of geopolitical tensions and concern that the conflict could escalate and widen will likely push gold and silver prices higher.

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