Oil prices experienced a significant upswing, and both the dollar and yen strengthened on Monday following an unexpected attack by Hamas on Israel over the weekend, intensifying worries about tensions in the Middle East.
The crisis heightened concerns regarding the supply of crude from the region, compounding existing apprehensions due to output cuts by Saudi Arabia and Russia. This event has reignited fears regarding inflation, as energy costs are a pivotal factor in the escalating prices, posing a new challenge for central banks striving to mitigate interest rate hikes and avert economic recessions.
The unexpected assault and Israel’s declaration of war in response have resulted in over 1,000 casualties, raising anxieties about the potential expansion of the conflict that could involve the United States and Iran. “Crucial for the markets is whether the conflict remains contained or extends to other regions, notably Saudi Arabia,” remarked ANZ Group’s Brian Martin and Daniel Hynes.
“Initially, it seems markets will assume the situation will remain limited in scope, duration, and oil-price consequences. However, higher volatility is anticipated.” Both main oil contracts experienced a surge of more than five percent during early Asian trading, subsiding slightly as the day progressed.
However, Stephen Innes of SPI Asset Management cautioned: “Historical analysis suggests that oil prices tend to sustain gains after Middle East crises. Meanwhile, stocks typically recover and trend higher after an initial period of volatility.
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Safe-haven assets like gold and Treasury, which initially witness gains during such crises, tend to taper off from their initial price spikes as the situation stabilizes.” With Middle East analysts viewing this event as a pivotal moment for Israel, the current perspective appears to be highly inflammatory. In response to the decidedly risk-off sentiment, investors sought refuge in the safety of the dollar, leading to its gains against the pound, euro, Australian dollar, and New Zealand dollar.
Gold, another prominent safe-haven asset, experienced an approximate one percent increase. Equity markets displayed a mixed performance, with Shanghai experiencing a decline on its first day back after a week-long holiday, driven by ongoing concerns about the Chinese economy.
Several Asian markets, including Mumbai, Singapore, Manila, Bangkok, and Wellington, also reported losses. Hong Kong, however, saw a rise in shortened trade after a morning closure due to a typhoon. Sydney and Jakarta managed slight gains, while Tokyo remained closed for a holiday. In the European markets, London edged up, but Paris and Frankfurt reported declines.
Despite a rally on Wall Street, where traders welcomed data revealing a forecast-beating surge in new jobs albeit with a slowdown in wage growth, the tepid market performance persisted. The figures, often referred to as “Goldilocks” figures—neither too strong nor too weak fueled optimism that the world’s leading economy can steer clear of a recession, even with the Federal Reserve maintaining elevated rates.
Nonetheless, there are concerns that the bank might enact one more rate hike before the year concludes, as officials are resolute in taming inflation and anchoring it to their two percent target.
