U.S. stock futures witnessed a decline as military tensions in the Middle East drove up oil prices and pushed investors towards safe-haven assets like Treasuries. Meanwhile, a robust U.S. jobs report for September raised expectations of an impending inflationary challenge later in the week.
Thin market conditions prevailed due to holidays in Japan and South Korea, but initial market sentiment favored bonds, Japanese yen, and gold as safe havens. Oil prices surged by over $3 per barrel.
Initially, the Israeli shekel sank to its lowest point since early 2015, hitting 3.9880 against the U.S. dollar. In response, Israel’s central bank offered to sell up to $30 billion worth of shekels to stabilize the currency. This prompt action helped the shekel recover to 3.9050, with the central bank expressing readiness to provide liquidity as required.
According to analysts at CBA, the heightened risk of rising oil prices, equity market downturns, and increased volatility is bolstering the U.S. dollar and yen while undermining ‘risk’ currencies. They also noted the potential disruption of oil supplies from Iran, stating that “Given the tightness already facing physical oil markets in Q4 2023, an immediate reduction in Iran’s oil exports risks pushing Brent futures above $US100/bbl in the short term.”
Over the weekend, Israel carried out significant military operations in the Palestinian enclave of Gaza, resulting in hundreds of casualties in retaliation for one of the deadliest attacks in its history, in which the Islamist group Hamas killed 700 Israelis and abducted dozens more.
The threat of disruptions to the oil supply was sufficient to propel Brent crude up by $3.14 to reach $87.72 per barrel, while U.S. crude rose by $3.28 to $86.07 per barrel. Gold also gained demand, rising by 1.1% to reach $1,852 per ounce.
In currency markets, the yen emerged as the primary beneficiary, although overall movements were relatively modest. The euro declined by 0.3% to 157.37 yen, while the dollar dipped by 0.1% to 149.14 yen. Additionally, the euro weakened by 0.3% against the dollar, reaching $1.0552.
This cautious sentiment provided respite for sovereign bonds after a recent period of heavy selling. Ten-year Treasury futures recorded a significant gain of 12 ticks, with yields indicated at around 4.74%, down from 4.81% on the previous Friday.
The rise in oil prices could potentially act as a consumer tax and add to inflationary pressures, weighing on equities. S&P 500 futures dropped by 0.8%, and Nasdaq futures declined by 0.7%. EUROSTOXX 50 futures slid by 0.4%, and FTSE futures dipped by 0.1%.
While the Tokyo market was closed, Nikkei futures traded down by 1.0%, close to the previous cash market closing level. MSCI’s broadest index of Asia-Pacific shares outside Japan remained relatively flat, with Chinese blue chips down by 0.6% upon returning from their holidays.
The robust U.S. jobs report had fueled expectations of prolonged high-interest rates, with a major test ahead in the form of September consumer price data. Median forecasts anticipated a 0.3% increase in both headline and core inflation measures, potentially slowing the annual inflation pace.
Minutes from the recent Federal Reserve meeting, scheduled for release later this week, will provide insight into the seriousness of Fed members regarding interest rates. Early market sentiment on Monday seemed to suggest that Middle East developments might deter further Fed rate hikes, potentially hastening a policy easing in the coming year.
Fed fund futures now implied an 86% likelihood of rates remaining unchanged in November, with approximately 75 basis points of cuts priced in for 2024.
China will also return from its holiday this week with a slew of economic data releases, including consumer and producer inflation, trade figures, credit, and lending growth.
The Middle East conflict could cast a shadow over the commencement of the corporate earnings season, with 12 S&P 500 companies, including JP Morgan, Citi, and Wells Fargo, reporting this week. Goldman Sachs anticipates 2% sales growth, with a 55 basis point contraction in margins to 11.2% and flat earnings per share compared to last year.
Goldman analysts noted, “Near-trend economic growth and moderating inflation pressures will support modest sales growth and slim margin improvement. However, substantial margin expansion is unlikely given the ‘higher for longer’ interest rate regime, resilient wage growth, and AI investments among some tech firms.”
