US Stocks Slide as Middle East Conflict Boosts Oil and Treasuries
Military Conflict in the Middle East Fuels Market Volatility
U.S. stock futures slid in Asia on Monday due to the ongoing military conflict in the Middle East. This conflict has resulted in a surge in oil prices and increased demand for safe-haven assets like Treasuries. The release of the September U.S. jobs report has also raised concerns about inflation figures for the upcoming week. While holidays in Japan and South Korea have led to thin market conditions, bonds, the Japanese yen, and gold have seen increased demand.
Risk Factors and Potential Disruptions in Oil Supply
Analysts at CBA note that higher oil prices, a slump in equities, and increased volatility have supported the U.S. dollar and yen while undermining ‘risk’ currencies. The possibility of disruptions to oil supplies from Iran adds to the risk factor. The tightness already facing physical oil markets in Q4 2023 may lead to a short-term surge in futures above $100 per barrel.
Middle East Conflict and Its Impact on Oil Prices
Israel’s retaliation against the Palestinian enclave of Gaza has resulted in hundreds of casualties. This attack was in response to one of the bloodiest attacks in Israeli history, where Hamas killed 700 Israelis and abducted several more. The potential for supply disruptions has driven Brent crude up by $4.24 to $88.82 per barrel, while West Texas Intermediate (WTI) crude climbed $4.26 to $87.05 per barrel.
Increased Demand for Gold and Strengthening Yen
Gold prices have also seen an upward trend, rising 0.8% to $1,848 per ounce. In currency markets, the yen has emerged as the main gainer, although overall movements have been modest. The euro has eased 0.3% to 157.44 yen, while the dollar dipped 0.1% to 149.14 yen. Against the dollar, the euro has also eased by 0.2% to $1.0566.
Positive Impact on Sovereign Bonds
The cautious market sentiment has provided relief for sovereign bonds, which have recently experienced heavy selling. As a result, 10-year Treasury futures have risen by a significant 11 ticks. Yields are currently indicated around 4.75%, compared to 4.81% on Friday.
Impact on Equities and Future Market Predictions
The rise in oil prices acts as a tax on consumers and adds to inflationary pressures, which has weighed on equities. As a result, the S&P 500 shed 0.8% and Nasdaq futures lost 0.7%. Euro Stoxx 50 futures slipped 0.4%, while Nikkei futures were trading down 0.8%.
Market Reaction and Expectations for Interest Rates
The strong U.S. jobs report has led to expectations that interest rates will remain high for a longer duration. 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, indicating a slight slowdown in the annual pace of inflation. The minutes from the last Federal Reserve meeting, due this week, will provide insight into the seriousness of members regarding rate hikes.
Expectations of Fed Policy Easing and China’s Upcoming Data
Market sentiment suggests that developments in the Middle East may deter further Federal Reserve rate hikes and potentially expedite policy easing next year. Fed fund futures currently imply an 86% chance of rates remaining on hold in November, with approximately 75 basis points of cuts priced in for 2024. Additionally, China’s return from holiday will bring a deluge of data, including consumer and producer inflation, trade, credit, and lending growth.
Implications for Corporate Earnings and Projections
The news from the Middle East could negatively impact the start of corporate earnings season. This week, 12 companies including JP Morgan, Citi, and Wells Fargo will report their earnings. Goldman Sachs projects a 2% sales growth, with a 55 basis points margin contraction to 11.2% and flat earnings per share compared to last year. Factors such as near-trend economic growth, moderating inflation pressures, resilient wage growth, and investments in artificial intelligence among some tech firms contribute to this projection.
