Stock Futures Slip in Asia as Middle East Conflict Boosts Oil and Treasuries; September US Jobs Report Raises Rate Stakes
U.S. stock futures experienced a decline in Asia on Monday due to the ongoing military conflict in the Middle East, which boosted the prices of oil and Treasuries. Additionally, the release of the impressive September U.S. jobs report raised the stakes for inflation figures that are expected later in the week. Though trading conditions were thin due to a holiday in Japan, there was initial bidding for bonds and safe-haven assets such as the Japanese yen and gold, resulting in the euro suffering losses.
Analysts at CBA highlighted the risks of higher oil prices, a slump in equities, and increased volatility, all of which could support the U.S. dollar and yen while undermining risk currencies. They specifically mentioned the possibility of disruptions in oil supplies from Iran and the potential impact on Brent futures. The tightness in physical oil markets in the fourth quarter of 2023 could lead to Brent futures exceeding $100 per barrel in the short term.
Over the weekend, Israel launched attacks on the Palestinian enclave of Gaza in retaliation for a deadly attack by the Islamist group Hamas. The threat of supply disruptions contributed to a significant increase in Brent, which rose by $2.88 to reach $87.46 per barrel. U.S. crude also climbed by $3.02 to $85.81 per barrel. Gold saw an increase in demand as well, with prices rising by 0.8% to $1,848 an ounce.
In the currency markets, the yen emerged as the main gainer, although overall movements were relatively modest. The euro witnessed a decline of 0.3% against the yen, reaching 157.44, while the dollar dipped by 0.1% to 149.14 yen. The euro also eased by 0.2% against the dollar, reaching $1.0566.
The cautious mood in the market provided some respite for sovereign bonds following recent heavy selling. As a result, 10-year Treasury futures saw a rise of 14 ticks, indicating yields around 4.73% compared to 4.81% on Friday.
The surge in oil prices poses a risk for consumers and adds to inflationary pressures, which resulted in a decline in equities. S&P 500 futures shed 0.7%, while Nasdaq futures lost 0.6%. Nikkei futures, which were trading while the Tokyo market was closed, experienced a decrease of 0.8%, closing near the levels of the previous session.
The robust U.S. jobs report heightened expectations of prolonged high-interest rates, with further data on September consumer prices set to provide another major test. Median forecasts anticipate a 0.3% gain in both the headline and core measures, which could result in a slight slowdown in the annual inflation rate. Minutes from the recent Federal Reserve meeting, scheduled for release later this week, will provide valuable insights into the members’ stance on interest rates.
Market participants are currently speculating that developments in the Middle East could potentially deter further interest rate hikes by the Federal Reserve and even accelerate a policy easing in the coming year. Fed fund futures imply an 86% chance of rates remaining on hold in November, with approximately 75 basis points in cuts priced in for 2024.
As China resumes trading after a holiday, investors will closely monitor a deluge of data on consumer and producer inflation, trade, credit, and lending growth. The news from the Middle East may overshadow the start of the corporate earnings season, with 12 S&P 500 companies, including JP Morgan, Citi, and Wells Fargo, set to report their results this week.
Goldman Sachs forecasts 2% sales growth, a 55 basis point margin contraction to 11.2%, and flat earnings per share compared to the previous year. The investment bank expects moderate sales growth and slight margin improvement supported by near-trend economic growth and moderating inflation pressures. However, substantial margin expansion is unlikely given the current higher for longer interest rate environment and other factors such as resilient wage growth and artificial intelligence investments among certain tech companies.
In conclusion, the military conflict in the Middle East has boosted oil and Treasuries, while the impressive September U.S. jobs report has raised concerns about inflation and the potential for higher interest rates. The situation in the Middle East could have significant implications for oil markets and supply disruptions. Investors are closely watching developments in the region and how they may impact global markets and monetary policy decisions.