The global economic landscape is currently being shaped by two major events: the strong U.S. jobs data and the escalating tensions in the Middle East.

These developments have had significant impacts on global currencies and commodities, with the U.S. dollar rallying and other major currencies, including Japan's yen, experiencing declines. The U.S. jobs report showed the biggest jump in jobs in six months in September, a drop in the unemployment rate, and solid wage rises. These indicators point to a resilient economy, forcing markets to reduce pricing for Federal Reserve rate cuts.

Chris Weston, head of research at Australian online broker Pepperstone, noted that with rate cuts still being the default position, and when married to upbeat earnings expectations and China going hard on liquidity and fiscal, the equity bull case and the U.S. dollar get a shot in the arm.

However, the geopolitical situation in the Middle East remains a concern. Israel has been bombing Hezbollah targets in Lebanon and the Gaza Strip, escalating tensions in the region. This comes ahead of the one-year anniversary of the Oct. 7 attacks that sparked its war. Israel's defense minister declared all options were open for retaliation against arch-enemy Iran.

Impact on Stocks and Oil Market

Despite these developments, U.S. stocks closed solidly higher on Friday, reassured by the stronger-than-expected jobs report. The oil market has also been affected by these events. Brent crude oil futures were 0.7% lower on Monday, but rose more than 8% last week, the largest weekly gain since early January 2023. This increase in oil prices was driven by the anticipation of potential supply disruptions due to the escalating Middle East conflict.

Meanwhile, the yen's underperformance has also been influenced by comments from Japan's new prime minister, Shigeru Ishiba, which stoked expectations that rate hikes in Japan are further away. This has led to the yen falling to 149.10, its weakest level since Aug. 16.

The U.S. 10-year Treasury yields were last up a basis point (bps) at 3.9905%, their highest in nearly two months. Yields dipped early last week when investors bought safe-haven Treasuries after Iran launched more than 180 missiles against Israel in escalating geopolitical tensions.

Market Expectations and Future Outlook

Market expectations have swung to the extreme for the Federal Reserve to do just a 25 bps cut in November, rather than 50 bps, following the jobs data. They now price in a 95% chance of a quarter point cut, up from 65% in the middle of last week, and a 5% chance of no cut at all, according to CME's FedWatch tool.

Sterling was also flat around $1.3122, nursing last week's 1.9% drop, its steepest fall since early 2023. Bank of England Chief Economist Huw Pill said on Friday the central bank should move only gradually with cutting interest rates, a day after governor Andrew Bailey was quoted as saying the BoE might move more aggressively to lower borrowing costs.

In the Middle East, the Israeli military has continued to bombard Lebanon's capital, in what it said was a "series of targeted strikes" on weapons storage facilities and other parts of Hezbollah's infrastructure. Israeli strikes across the country on Saturday killed 23 people and injured 93, according to the Lebanese health ministry.

Elsewhere, Israel has said that it has "encircled" the Jabalya refugee camp in northern Gaza, after detecting the presence of Hamas members in the area. Strikes on a mosque in central Gaza have killed at least 25, hospital officials said.

As we look ahead, it's clear that the interconnectedness of economic and geopolitical events will continue to shape global markets. The current situation in the Middle East could potentially have similar impacts on the global economy, particularly if the conflict escalates further. These events underscore the importance of understanding the complex interplay between economic indicators and geopolitical developments in shaping global financial markets.