Conflict in Middle East Sparks Investor Worries and Volatility
NEW YORK, Oct 28 (Reuters) – The intensifying conflict in the Middle East is causing concern among investors, who are closely monitoring the situation for potential escalations over the weekend. The increasing tensions in the region are expected to add volatility to the markets as investors prepare for a Federal Reserve meeting and key U.S. data in the coming week.
Israeli Prime Minister Benjamin Netanyahu announced on Saturday that Israeli forces had entered the second phase of the Gaza war as they continue to carry out ground operations against Hamas militants. The conflict has raised alarm among investors, particularly after the United States dispatched more military assets to the Middle East and Israel launched attacks on targets in Gaza, as well as Hamas supporters in Lebanon and Syria.
“The situation in Israel is … causing a lot of anxiety,” noted Randy Frederick, managing director of trading and derivatives for Charles Schwab.
The impact of the conflict on oil prices has been relatively mild so far. Brent futures settled up 2.9% at $90.48 a barrel on Friday due to concerns that the conflict could disrupt crude supplies. Additionally, spot gold, a popular safe haven for nervous investors, exceeded $2,000 for the first time since mid-May.
Analysts at Capital Economics stated in a note on Friday that the oil market’s response to the conflict has been relatively muted. However, they noted that if other countries in the region become more involved in the conflict, oil prices could rise sharply.
Moreover, an escalation of the conflict leading to increased war-related spending by the United States could raise the deficit and potentially cause Treasury yields to surpass the 16-year highs they have already reached, warned Peter Cardillo, chief market economist at Spartan Capital Securities.
On the other hand, some investors anticipate that a widening conflict could prompt safe-haven buying of Treasuries, which could moderate the surge in yields and provide relief to stocks and other assets. The S&P 500 has experienced a decline of more than 10% since late July, but remains up more than 7% year-to-date.
“So far, U.S. government bonds have not been performing their usual safe-haven function,” UBS Global Wealth Management stated in a note on Friday. “However, an escalation of the conflict would likely shift attention away from monetary policy concerns and boost safe-haven demand for Treasuries.”
Both gold and oil can serve as hedges against near-term volatility, according to analysts. The Cboe Volatility Index (VIX) has risen in response to the conflict and reached seven-month highs on Friday.
In addition to the conflict, investors will be closely watching the Federal Reserve’s latest monetary policy statement, scheduled for Wednesday, as well as corporate earnings reports, including Apple’s quarterly results.
Reporting by Lewis Krauskopf; Additional reporting by David Randall; Editing by Ira Iosebashvili, David Gregorio, and Diane Craft