Middle East Tensions Trigger Financial Turbulence: Markets React to Israeli Conflict

09.10.2023 posted by Admin

Middle East Conflict Spikes Financial Market Fluctuations

Tensions in the Middle East had several significant impacts on financial markets on Monday. Oil prices, gold, and government bonds, considered safe investments, saw increases, while global stocks and Israeli assets took a hit. This followed a strong U.S. jobs report in September that heightened concerns about inflation rates in the coming week.

Israeli government bonds experienced a decline, particularly the 'Hundred Year' bond of 2120, which dropped by 5.3 cents per dollar, reaching an all-time low. The Israeli shekel also depreciated, hitting its lowest point since 2016 at 3.9880 per dollar. In response, the country's central bank offered to sell up to $30 billion in foreign currency to stabilize the situation.

To mitigate the shekel's losses, the central bank announced its commitment to providing liquidity to the markets as necessary.

The conflict in the region escalated on Sunday as Israel launched an attack on Gaza in retaliation for one of the deadliest assaults in its history, initiated by the Islamist group Hamas, which resulted in the death of 700 Israelis and the abduction of dozens more.

Peter Schaffrik, RBC Capital Markets' Chief European Macro Strategist, explained, "The uncertainty regarding the implications for the region is driving up oil prices, and there's a sense of 'risk-off,' causing bond markets to perform well while equity markets experience slight declines." He noted that for a more widespread and lasting market impact, the conflict would need to extend beyond Israel's borders.

Brent crude oil prices surged by as much as $4 per barrel at one point, ultimately trading up by approximately $3 or 3.55% at $87.61.

U.S. S&P 500 futures declined by 0.6%, and Europe's primary STOXX 600 index lost 0.3% due to the prevailing cautious sentiment, offering some relief to sovereign bonds following recent heavy selling. Ten-year Treasury futures gained 13 ticks, although the cash Treasury market remained closed on Monday in observance of Columbus Day.

Germany's 10-year Bund yield saw a drop of as much as 6 basis points to 2.83%, retracting from the 12-year high it reached last week.

Gold also experienced increased demand, with its price rising by approximately 1% to $1,850 per ounce.

These developments in the Middle East occurred amidst a backdrop of volatile markets and multi-year highs in bond yields worldwide. The bond sell-off resulted from a combination of factors, including asset managers abandoning long government bonds, rising oil prices, a surplus of government and corporate bond supply, and investors acknowledging that central banks were likely to maintain high interest rates for an extended period.

The robust U.S. jobs report on Friday further reinforced the expectation of higher rates for a longer duration. Investors are now looking ahead to Thursday's consumer price data for September, with median forecasts anticipating a 0.3% increase in both headline and core measures, which should moderate the annual inflation rate slightly.

Additionally, the release of minutes from the latest Federal Reserve meeting this week will provide insights into the central bank's stance on maintaining elevated rates or potentially raising them. Currently, Fed fund futures suggest an 86% probability that the Fed will keep rates steady in November, with approximately 75 basis points of cuts priced in for 2024.

China is set to return from a holiday break this week, bringing a flood of economic data, including figures on consumer and producer inflation, trade statistics, credit, and lending growth. Meanwhile, the country's property market continues to face challenges, as reports suggest that troubled developer Country Garden (2007.HK) may announce a restructuring of its offshore debt, while bondholders of the even more beleaguered China Evergrande Group (3333.HK) express concerns about potential liquidation as its debt restructuring plans falter.

The developments in the Middle East could cast a shadow over the beginning of the U.S. corporate earnings season, with 12 S&P 500 companies, including JP Morgan, Citi, and Wells Fargo, scheduled to report this week.

In currency markets, safe-haven currencies like the Japanese yen, Swiss franc, and U.S. dollar gained ground, although oil-based currencies also received some support. The dollar index, tracking the greenback against six other major currencies, rose by 0.27% to 106.4, while the euro fell by 0.65% against the Japanese yen, reaching 157.0 yen.
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