The global financial market has been thrown into chaos due to rising interest rates. The outbreak of the Palestinian-Israeli conflict has caused oil prices to surge and reignited inflationary panic. A new round of global market storm is brewing.
The yen and the U.S. dollar, normally safe-haven currencies, strengthened on Monday. And benefiting from rising oil prices, the Norwegian krone rose against all G10 currencies.
Major U.S. stock index futures fell across the board, with S&P 500 futures down 0.7%. Asian stock markets were mixed, with major Middle East stock indexes falling on Sunday and Israel's benchmark TA-35 stock index falling 6.4%, its biggest drop in more than three years.
U.S. Treasury futures climbed after the open on Monday, while cash Treasuries were closed for the Columbus Day holiday. Bond traders need to quickly determine whether the conflict is the reason investors are rushing to seek the safety of the dollar and shy away from high-yield debt, or whether it is the trigger for another round of inflation scares.
Most analysts believe that the Palestinian-Israeli conflict will bring more uncertainty to the market. As oil prices rise, inflation expectations rise sharply, and hawkish expectations from major central banks such as the Federal Reserve increase, further putting pressure on the stock market, and investors will turn to the United States. safe-haven assets such as bonds and the U.S. dollar.
Ed Yardeni, President of Yardeni Research, said:
Geopolitical crises in the Middle East typically lead to higher oil prices and lower stock prices. Much depends on whether this crisis becomes another short-term outbreak or something larger, like a war between Israel and Iran.
Andrea Tueni, head of sales trading at Saxo Bank, said:
I don't expect this to have a huge impact on the European or US markets. Geopolitical risks will certainly be important, depending on how the scale of the conflict evolves. The local stock market will certainly react to this, but I don't expect the same impact tomorrow.
The only asset class one can look at for a possible reaction is oil, but given that there is no impact on supply at the moment, I don't expect oil prices to rise significantly. One cannot compare the oil market today with 1973. If there were another dimension to the conflict, such as a direct Israeli attack on Iranian infrastructure, it would be a completely different story, but it is still early days.
Here is a summary of what other analysts have to say about the Israeli-Palestinian conflict:
Andbank senior equity fund manager Gonzalo Lardies said: This will add more uncertainty to the market, inflation and growth will slow down, and geopolitical risks will become the focus. We expect volatility to rise significantly, with short-term fixed income (products) once again becoming a safe haven and cyclical sectors taking center stage.
Guillermo Santos, head of strategy at Spanish private banking company iCapital, said: "As long as the stability of the region and Iran's violent expansionism in the security sphere do not further complicate the conflict, and the conflict is limited to Palestinians and Israelis, the consequences of all this will not matter." should have a particularly negative impact on financial markets.
Obviously, if this impact spreads to oil-producing countries, led by Saudi Arabia, it may make crude oil more expensive, thus having a negative inflationary impact in the West. If the above factors lead to an economic recession, it will mean higher long-term interest rates, and the stock market fell.
Alfonso Benito, chief investment officer of Dunas Capital, said: I do not expect this situation to have a significant impact on the market. This is a long-term dire situation, but aside from some short-term fluctuations, it shouldn't have much of an impact.
Richard Flax, chief investment officer at Moneyfarm, said: "The conflict has the potential to damage broad market sentiment, but this is not certain." We believe much will depend on whether the conflict is contained or expands (such as on Israel's northern border), which could exacerbate concerns about commodities, particularly oil. Oil prices have been volatile in recent weeks and could rise again in the coming months, impacting consumer prices.
Anthi Tsouvali, multi-asset strategist at State Street Global Markets, said: "Given the negotiations between Saudi Arabia and Israel, the timing of the conflict could not be worse." The impact of conflict in the Middle East on oil prices is clear. The market will be worried about rising energy prices, which could push stocks lower since we are already in a risk-off environment.
However, given the business cycle we are in and the fact that global demand has slowed, the impact of the conflict will not be as severe as the last energy crisis in 1973, as we may see more Saudi Arabian capacity coming to the market if needed to meet need.
Stocks should see this in terms of a repricing of risk assets, but as the market narrative shifts from a soft landing to a longer-term move higher, sentiment is likely to remain subdued for longer, which is bad for stocks in the long run.
Mazars chief economist George Lagarias said: The primary risk facing the global economy is the third wave of inflation, and the current wave of inflation is gradually weakening. Rising tensions in the Middle East could push up energy prices and undermine central bankers' efforts to control inflation. The geopolitical status quo has become increasingly uneven over the past few years, so the outcome of this new crisis may be more open than markets expect.
