A look at the day ahead in European and global markets by Wayne Cole.
The Asian action was dominated by news from Israel, with the usual safe haven suspects getting a bid. With a war already raging in Europe, a new conflict in the Middle East would undoubtedly roil the markets.
Oil led the charge with gains of as much as 5% for and , just as prices were falling.
Treasury futures also added a solid 13 ticks, although the cash market in Asia is closed for a holiday in Tokyo.
The yen has risen modestly on the security front, while the euro, in a region with high energy cost exposure, is lagging. After all, the US is an oil exporter. For stocks, U.S. and stock futures are down about 0.7%.
Analysts are considering the implications of Israel’s conflict with Hamas, how long it could last and whether it will drag others along.
The responses of Israel and the US to Iran will be crucial, given Hamas’ support. The Wall Street Journal reported that Tehran helped plan the attacks, although Iran’s mission to the United Nations said on Sunday that Tehran was not involved.
So far, Washington has reportedly taken a softer stance on the Iranian oil embargo as it tried to broker a grand peace deal across the Middle East. But that could change, especially if American civilians were to die in the fighting.
If the US tightens sanctions enforcement, CBA analysts estimate that around 0.5-1.0% of global oil supplies could be affected, pushing Brent above $100 per barrel.
A further risk would be that Iran would try to disrupt oil shipments in the Strait of Hormuz, through which 15 to 20% of the world’s supplies flow.
A sustained rise in oil prices would be an unwanted blow to inflation, but also a burden on consumers. The consequences for interest rates are therefore ambiguous.
Fed funds futures have actually risen, with a November rate hike now only a 14% chance and a small easing expected next year – about 78 basis points in total.
The strength of last Friday’s payroll report fit with the ‘longer high’ narrative on interest rates, although the slowdown in wage increases also argued against another increase. That raises the stakes for September’s CPI, which markets hope will show a further decline in year-over-year inflation.
This week also marks the start of the third quarter earnings season, with twelve members reporting, including JPMorgan, Citi and Wells Fargo.
Key developments that could impact the markets on Monday:
– Germany releases industrial production data for August
– ECB Vice President Luis de Guindos and Pablo Hernández de Cos, Governor of the Bank of Spain, participate in the financial meeting; ECB board member Andrea Enria speaks
– Appearances by Logan, Barr and Jefferson from the Fed
