Title: Middle East Conflict Sparks Surge in Oil Prices and Safe Haven Assets; US Stock Futures Slide
Date: October 9, 2023
Sydney – The military conflict in the Middle East has triggered a surge in oil prices and bolstered safe haven assets such as Treasuries, gold, and the Japanese yen. Meanwhile, US stock futures declined in Asia amid concerns over inflation figures and rising tensions in the region.
With holidays in Japan and South Korea, thin conditions prevailed in the market. However, the initial demand was evident for bonds and safe-haven assets. The euro was the main loser in the currency market.
Analysts at CBA noted, “The risk of higher oil prices, a slump in equities, and a surge in volatility supports the dollar and yen, while undermining ‘risk’ currencies.” They further added that there is a possibility of Iranian oil supplies being disrupted, which could tighten physical oil markets and push Brent futures above $100 per barrel in the short term.
In response to Israel’s retaliation for one of the bloodiest attacks in its history, tensions escalated in the Middle East. Israel pounded the Palestinian enclave of Gaza, resulting in hundreds of casualties. The threat of disruptions in oil supply prompted Brent crude prices to increase by $4.24 to $88.82 per barrel, while US crude climbed $4.26 to $87.05 per barrel.
The surge in oil prices also led to an increase in demand for gold, pushing its price up by 0.8% to $1,848 an ounce.
Although modest overall, the Japanese yen emerged as the main gainer in the currency market. The euro eased 0.3% against the yen, while the dollar dipped 0.1% against the yen and 0.2% against the euro.
The cautious sentiment in the market provided relief for sovereign bonds following recent heavy selling. 10-year Treasury futures rose by 11 ticks, indicating yields of around 4.75%, compared to 4.81% on Friday.
The rise in oil prices has raised concerns about adding to inflationary pressures and imposing additional taxes on consumers, which weighed on the equities market. S&P 500 futures shed 0.8%, Nasdaq futures lost 0.7%, EUROSTOXX 50 futures slipped 0.4%, and FTSE futures declined 0.1%.
While the Tokyo market was closed, Nikkei futures were trading down 0.8%, similarly to the closing of the cash market on Friday. MSCI’s broadest index of Asia-Pacific shares outside Japan remained flat, with Chinese blue chips dropping 1.1% after the holidays.
The robust September US jobs report fueled expectations that interest rates would remain high for a longer period. The upcoming data on September consumer prices will serve as another major test. Median forecasts predict a 0.3% gain in both headline and core measures, potentially slowing the annual pace of inflation.
Minutes of the last Federal Reserve meeting, scheduled for this week, will shed further light on members’ perspectives on keeping rates high or even hiking again.
Given the recent developments in the Middle East, the market anticipates that the Federal Reserve might lean towards easing policies next year. Fed fund futures now imply an 86% chance of rates staying on hold in November, with around 75 basis points of cuts priced in for 2024.
China, which returns from holiday this week, will present a deluge of data including consumer and producer inflation, trade figures, and credit and lending growth.
The conflict in the Middle East could dampen the start of the corporate earnings season, with twelve S&P 500 companies, including JP Morgan, Citi, and Wells Fargo, reporting this week. Goldman Sachs expects 2% sales growth, a 55 basis points margin contraction to 11.2%, and flat EPS relative to last year.
Goldman analysts believe that near-trend economic growth, moderating inflation pressures, and ongoing interest rate policies will support modest sales growth and slim margin improvement. However, they believe substantial margin expansion is unlikely due to resilient wage growth, AI investments among some tech firms, and the “higher for longer” interest rate regime.
Overall, the markets remain on edge amid escalating tensions in the Middle East and concerns over inflation, prompting investors to seek the safety of oil and safe haven assets while stocks face downward pressure.