Following a surprise attack by Hamas on Israel during the weekend, causing heightened concerns about Middle East tensions, oil prices saw an increase, and both the US dollar and yen strengthened on Monday.
This crisis has amplified worries about crude oil supplies from the region, particularly due to the output cuts by Saudi Arabia and Russia. Moreover, it has reignited fears about inflation, as rising energy costs contribute to soaring prices, posing a fresh challenge for central banks as they attempt to manage interest rates to prevent economic downturns.
The unexpected attack by Hamas and Israel's subsequent declaration of war, resulting in over 1,000 casualties, has raised apprehensions about the potential expansion of the conflict, possibly involving the United States and Iran.
Market experts, such as Brian Martin and Daniel Hynes from ANZ Group, highlight the significance of whether the conflict remains localized or spreads to affect other regions, especially Saudi Arabia, which could lead to higher market volatility.
While both main oil contracts initially surged by more than 5% in early Asian trading, they later moderated. Historically, oil prices tend to sustain gains following Middle East crises, while stock markets tend to eventually recover and trend upward after an initial period of volatility. Safe-haven assets like gold and Treasuries, initially boosted during such crises, tend to stabilize as the situation calms down.
The risk-off sentiment prompted investors to seek refuge in the US dollar, which gained against the pound, euro, and Australian and New Zealand dollars. The yen, known for its safety, also strengthened against the US dollar, albeit remaining at 11-month lows. Gold, another safe-haven asset, recorded a 1% increase.
Global equity markets displayed mixed performance, with Shanghai declining upon its return after a week-long holiday, and various losses in other Asian markets. Hong Kong, despite a typhoon-related morning closure, rose in abbreviated trade. Sydney and Jakarta saw slight gains, while Tokyo remained closed for a holiday.
In contrast, London saw a modest increase, while Paris and Frankfurt experienced declines. These market movements occurred despite a rally on Wall Street, where traders reacted positively to data showing a better-than-expected increase in new jobs but slower wage growth.
These "Goldilocks" figures, neither too strong nor too weak, instilled optimism about the US economy avoiding a recession while the Federal Reserve keeps interest rates elevated.
However, concerns persist that the central bank may raise rates once more by the end of the year to manage inflation and maintain its 2% target.