• Risk aversion eases as diplomatic efforts to end Israel-Gaza war ramped up

• Gold off highs, while earnings optimism additionally boosts Wall Street

• Dollar steady as yields resume climb ahead of US retail sales, Fed speakers

Risk sentiment was notably more buoyant on Tuesday as fears about the unfolding situation in Israel and Gaza developing into a wider conflict ebbed somewhat. A rush of diplomacy by global leaders to defuse the crisis appears to have soothed investor nerves for now, easing demand for safe havens such as gold.

US President Joe Biden is set to visit Israel on Wednesday in a show of solidarity to the country, while Secretary of State Antony Blinken made his second visit in as many days, underscoring the intense diplomatic efforts to contain the conflict and prevent a humanitarian catastrophe in Gaza.

The geopolitical uncertainty couldn’t have come at a worse time for equities, which are already grappling with decade-high bond yields. Central banks led by the Fed have been flying the ‘higher for longer’ flag in recent months, dashing hopes that interest rates would be slashed soon now that inflation is on its way down.

If there is a silver lining from the tensions in the Middle East it is that the flight to safety boosted sovereign bonds, pushing yields lower. But that trend appears to be reversing as the initial panic subsides and the 10-year US Treasury yield is back in the 4.75% range today.

Nevertheless, optimism about the Q3 earnings season is rekindling the bulls after the big Wall Street banks that have reported so far all posted better-than-expected results. Bank of America and Goldman Sachs will be next to report today before the market close, although the real test for the markets will come tomorrow when Netflix and Tesla kick off the tech earnings.

European and Asian markets opened in positive territory on Tuesday after the S&P 500 and Nasdaq notched up gains of 1% yesterday.

Gold remained under pressure for a second day as jitters about the latest violence between Israelis and Palestinians faded, albeit slightly. The precious metal staged a more than 5% rally over the past week, peaking above $1,930/oz on Friday. It has since eased to around $1,920 but there seems to be some pushback against a steeper retreat amid the volatile nature of this conflict that’s keeping investors on alert.

Oil prices also seem to have found support, with WTI futures attempting to reclaim the $90 a barrel level.

The US dollar is similarly not ready to give up all of its safe-haven-led gains and is clawing back some of yesterday’s losses. However, the greenback’s strength today is mainly built on the ongoing weakness in the euro and pound, with the latter taking a knock from softer-than-expected wage growth data out of the UK.

US retail sales will come under the spotlight later today as well as speeches from Fed officials, including Williams, Bowman and Kashkari.

Expectations for a 25-bps rate hike by January have edged up slightly in the past 24 hours despite a growing number of Fed officials arguing against further tightening in recent days. It’s likely that there’s some reluctance in the markets to completely price out a further rate increase until Fed Chair Powell gives his blessing to a permanent pause. Powell is due to speak on Thursday.

The Australian dollar was the best performer on Tuesday even though it was unable to hold onto its earlier gains to turn flat by mid-European session. The aussie was boosted from the minutes of the RBA’s October meeting, which once again revealed that the decision to keep rates on hold was a close one.

In contrast, the New Zealand dollar was the worst performing major as the currency came under pressure from lower-than-expected CPI numbers for the third quarter.