As the Middle East war increased the price of oil and Treasuries, U.S. stock futures fell in Asia on Monday. Meanwhile, the hot September U.S. jobs report raised the stakes for inflation data later in the week.
Due to a holiday in Japan, conditions were thin, but the early demand was for bonds and the safe havens of gold and the Japanese yen, with the euro being the largest loser.
“The risk is higher oil prices, a slump in equities, and a surge in volatility that supports the dollar and yen, and undermine ‘risk’ currencies,” according to CBA analysts in a note.
They noted that there was a potential that shipments from Iran could be interrupted in particular.
In retribution for one of the worst attacks in modern history, in which the Islamist group Hamas killed 700 Israelis and kidnapped dozens more, Israel bombarded the Palestinian enclave of Gaza on Sunday, killing hundreds of civilians.
The threat of supply disruptions was sufficient to cause Brent to increase by $2.88 to $87.46 a barrel and U.S. oil to increase by $3.02 to $85.81. [O/R]
Additionally in demand, gold increased 0.8% to $1,848 per ounce. [GOL/]
Any extended increase in oil prices would be a tax on consumers and heighten inflationary pressures, which would impact on the stock market and cause the S&P 500 futures to drop 0.7% and the Nasdaq futures to fall 0.6%.
Nikkei futures were trading 0.8% down while Tokyo was closed, close to where Friday’s cash market ended.
The largest MSCI index of Asia-Pacific stocks outside of Japan increased 0.2%.
The strength of the U.S. jobs report had raised anticipation that interest rates would need to remain high for longer, with data on September consumer prices posing another significant test.
Both the headline and core measures are expected to increase by 0.3% on average, which could result in a slight slowdown in inflation’s annual rate.
The minutes from the most recent Federal Reserve meeting are due this week and should provide insight into how committed members were to maintaining current interest rates or maybe raising them once more.
Markets appeared to believe early on Monday that Middle East developments would be against more Fed rises and would speed a policy easing next year.
Fed fund futures indicated that there was an 86% chance that interest rates would remain unchanged in November and that 75 basis points of reductions were priced in for 2024.
This week, China returns from vacation with a flood of data, including increases in consumer and producer inflation, trade, credit growth, and lending.
The start of the corporate earnings season, which will see 12 S&P 500 corporations, including JP Morgan, Citi, and Wells Fargo, report this week, could be soured by the news out of the Middle East.
According to Goldman Sachs, sales will increase by 2% but margins will decline by 55 basis points to 11.2% and EPS will be unchanged from last year.
“Near-trend economic growth and moderating inflation pressures will support modest sales growth and slim margin improvement,” Goldman analysts write in a report.
“However, substantial margin expansion is unlikely given the ‘higher for longer’ interest rate regime, resilient wage growth, and AI investments among some tech firms.”