Middle East Conflict Sends US Stocks Down, Oil Prices Surge

In the wake of escalating military tensions in the Middle East, U.S. stock futures took a dip in Asian trading on Monday. This geopolitical unrest not only rattled the stock market but also triggered a surge in oil prices while bolstering Treasuries. The situation unfolded amid positive indicators from the U.S. job market in September, adding to the anticipation surrounding the forthcoming inflation data release later in the week.

It’s worth noting that Japan and South Korea observed holidays during this period, resulting in somewhat thinner trading conditions. However, safe-haven assets like bonds, gold, and the Japanese yen saw an uptick in demand, while the euro experienced a decline.

Analysts from CBA highlighted the potential risks stemming from the Middle East crisis. These risks encompass elevated oil prices, a downturn in equities, and heightened volatility. Such developments could strengthen the U.S. dollar and yen while weakening currencies typically associated with higher risk. Additionally, there’s the looming possibility of disruptions to Iran’s oil supplies, which, given the already strained physical oil markets in the fourth quarter of 2023, could propel Brent futures above $US100 per barrel in the short term.

The conflict in the Middle East saw Israel responding forcefully to an attack by Hamas in the Palestinian enclave of Gaza, resulting in a significant number of casualties on both sides. The specter of potential supply disruptions drove Brent crude up to $88.82 a barrel, with U.S. crude following closely at $87.05 per barrel. This turmoil also sparked a surge in demand for gold, which climbed by 0.8 percent to reach $1,848 an ounce.

In the currency markets, the Japanese yen emerged as the primary gainer. Meanwhile, the euro faced a 0.3 percent decline against the yen, and the dollar saw a 0.1 percent slip to 149.14 yen. The euro also experienced a 0.2 percent decrease against the dollar, trading at $1.0566.

The cautious sentiment in the market provided some respite for sovereign bonds following a period of heavy selling, with 10-year Treasury futures registering a significant rise. Yields were seen at approximately 4.75 percent, down from 4.81 percent on the previous Friday.

However, concerns over sustained oil price rallies, which have the potential to intensify inflationary pressures and act as a consumer tax, weighed on the equities market. S&P 500 futures experienced a drop of 0.8 percent, while Nasdaq futures slipped by 0.7 percent.

The robust U.S. jobs report reinforced expectations of enduringly high interest rates, with forthcoming data on September consumer prices serving as another pivotal test. The market predicts a 0.3 percent increase in both headline and core measures, which is expected to lead to a slight deceleration in the annual inflation rate.

This week, the release of minutes from the last Federal Reserve meeting will offer further insights into the central bank’s members’ views on maintaining or potentially increasing interest rates. As of early Monday, market sentiment suggested that developments in the Middle East might discourage further Fed rate hikes and possibly even prompt policy easing in the coming year.

As China returns from its holiday, a slew of data releases is expected, encompassing consumer and producer inflation, trade figures, credit statistics, and lending growth figures. The ongoing Middle East developments could cast a shadow over the commencement of the corporate earnings season, with 12 S&P 500 companies, including heavyweights like JP Morgan, Citi, and Wells Fargo, scheduled to report their results this week.