U.S. stock futures experienced a decline in Asia due to the escalating military conflict in the Middle East. This development has led to an increase in oil prices and a surge in demand for safe-haven assets such as Treasuries, gold, and the yen. The September U.S. jobs report, which exceeded expectations, also raised the stakes for upcoming inflation figures later in the week.
The initial trading session in Asia was impacted by the holiday in Japan, resulting in thin market conditions. However, there was a notable demand for bonds and safe-haven assets. Analysts at CBA emphasized the potential risks of higher oil prices, a decline in equities, and increased volatility that could support the dollar and yen while undermining riskier currencies.
Of particular concern is the possibility of supply disruptions from Iran. Already facing tight conditions in physical oil markets, an immediate reduction in Iran’s oil exports could push Brent futures above $100 per barrel in the short term.
The military conflict in the Middle East intensified on Sunday, with Israel launching attacks on the Palestinian enclave of Gaza. This retaliatory move followed one of the bloodiest attacks in Israel’s history, during which the Islamist group Hamas killed 700 Israelis and abducted several others. The potential disruptions to oil supply have caused Brent crude to surge by $2.88 to $87.46 per barrel, while U.S. crude climbed by $3.02 to $85.81 per barrel.
As investors sought safe-haven assets, gold prices also experienced a rise of 0.8%, reaching $1,848 per ounce. In currency markets, the Japanese yen emerged as the main gainer, although the overall movements were relatively modest. The euro dipped by 0.3% against the yen, reaching 157.44 yen, while the dollar experienced a 0.1% decline against the yen, settling at 149.14 yen. The euro also eased by 0.2% against the dollar, trading at $1.0566.
The cautious mood among investors provided relief for sovereign bonds, which had been facing significant sell-offs recently. As a result, 10-year Treasury futures rose by a considerable 14 ticks, with yields indicating around 4.73% compared to 4.81% on Friday.
This rise in oil prices poses a potential burden on consumers and contributes to inflationary pressures. Consequently, equities experienced a decline, with S&P 500 futures shedding 0.7% and Nasdaq futures losing 0.6%.
While Tokyo’s market was closed due to the holiday, Nikkei futures were trading down 0.8%, in close proximity to the closing level of the cash market on Friday. On the other hand, MSCI’s broadest index of Asia-Pacific shares outside Japan saw a marginal increase of 0.2%.
The strength of the U.S. jobs report has led to expectations of prolonged high-interest rates, with September consumer price data looming as another major test. Median forecasts anticipate a 0.3% gain in both the headline and core measures, which should result in a slight slowdown in the annual pace of inflation.
This week, the release of the minutes of the last Federal Reserve meeting will help gauge the seriousness of policymakers regarding the maintenance or further increase of interest rates. At present, developments in the Middle East appear to be leaning against any further Fed rate hikes, possibly hastening a policy easing in the coming year.
Fed fund futures currently indicate an 86% chance of rates remaining unchanged in November. Furthermore, they imply around 75 basis points of cuts being priced in for 2024.
China, having returned from a holiday, will release a deluge of data this week, covering consumer and producer inflation, trade, credit, and lending growth. The developments in the Middle East may adversely affect the start of the corporate earnings season, with 12 S&P 500 companies, including JP Morgan, Citi, and Wells Fargo, reporting their earnings this week.
According to Goldman Sachs, modest sales growth of 2% and slight margin contraction of 55 basis points to 11.2% are anticipated, along with flat earnings per share compared to the previous year. The investment bank expects near-trend economic growth and moderating inflation pressures to support these projections. However, substantial margin expansion is unlikely due to the prolonged low-interest-rate environment, resilient wage growth, and artificial intelligence investments among certain technology firms.