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Weekly Summary: Middle East Conflict Escalation, Weaselly Powell and Bad Tesla Reporting

This week closes on very alarming notes. The S&P 500 broad market index is balancing on the verge of the important support at 4260-4280 points. The Israeli-Palestinian conflict is escalating. Debt markets are under huge pressure with surging yields.

The U.S. president Joe Biden has left Israel this week without any major success in a settlement of the conflict. Moreover, the United States are starting to be dragged into the conflict after USS Carney, a Navy destroyer in the Red Sea, has shot down missiles and drones launched from the Yemen territory, weapons that the Pentagon says were "heading along the Red Sea, potentially toward targets in Israel."

Market were very nervous in response to the news. A chain reaction started with the 4% up of crude prices and followed by surging 10-year Treasuries yields that resulted in a slump of the S&P 500 index by 1.3%. This weekend may potentially bring another round of escalation that would trigger this chain reaction again pushing the S&P 500 index down below the support at 4260-4280 points. This small step would open a broad path towards a 12% slump of the index to 3700-3800 points. It is unlikely the index would stop at this level. The spread between 10-year and 2-year Treasuries yields is narrowing. This is a solid signal that the recession in the U.S. is nearing.

So, the upcoming weekend would be very nervous and tense. If there will be no escalation in the Middle East there is a chance that the “Magnificent Seven” of seven largest U.S. companies may support the stock market. Investors hope that Microsoft, Alphabet, Meta, Amazon and other mega caps would hold the market from plunging to the downside. But this might be a wishful thinking after Tesla, a famous EV car maker, missed consensus estimates. Its stocks dived by 9.0% immediately. On the other hand, Netflix has delivered exceptional Q3 results with increasing revenues and prices. Investors were happy boosting its stock prices by 16%.

However, there are not so many positive news to support stocks. The Federal Reserve (Fed) Chairman Jerome Powell said that inflation need further cooling considering economic resilience. Rising debt yields may mean an end of interest rates hike cycle. But, it is too early to declare victory over inflation, according to Powell. “A range of uncertainties, both old and new, complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little,” Powell said.

Investors were disappointed as stock indexes would continue to deteriorate in high borrowing costs. Even if the money market alone generates this increase.

Technically, the S&P 500 index downside formation with a primary target at 4100-4150 points and extreme targets at 3700-3800 points has not changed. The nearest support is at 4260-4280 points. A strong resistance is located at 4340-4370 points. Short trade was opened from 4360 points two weeks ago. 

Oil market is bracing for impact. Brent crude prices are testing the upper margin of the resistance at $92.00-94.00 per barrel. If prices would pass this level a rise to $100 per barrel would be a likely scenario. It prices would climb above this level than a path towards $150.00 per barrel will be opened. On the other hand, if prices would roll back below $92.00 level they may continue down to $83.00-85.00 per barrel. 

Gold prices are moving inside the mid-term upside formation with targets at $2000-2100 per troy ounce that have already been met. The resistance at $1910-1930 was smashed. Prices are moving towards the $2000 per ounce threshold. Any long trades that were opened are likely to be closed at this level.

The Greenback was mostly losing its gains this week. It may recover with ease in case of a further escalation in the Middle East. There are almost no good trades at the moment. A short trade with a small amount for GBPUSD from 1.21200-1.21500 with a primary target at 1.20500 and the secondary target at 1.19800 and stop-loss at 1.21700 could look promising.