Middle East Conflict and Sizzling U.S. Jobs Report Create Turbulent Start to the Week

U.S. stock futures tumbled as the military conflict in the Middle East sent shockwaves through global markets, causing oil and Treasuries to surge.

Meanwhile, the release of a robust U.S. jobs report for September heightened concerns about inflation rates.

With holidays in Japan and South Korea thinning trading volumes, investors sought refuge in safe-haven assets, including Japanese yen and gold.

Oil prices rose by over $3 a barrel amid fears of potential supply disruptions from Iran.

Analysts at CBA explained that the risk of higher oil prices, equity market declines, and increased volatility supporting the U.S. dollar and yen while undermining “risk” currencies.

They also warned that disruptions to Iran’s oil exports could push Brent crude oil above $100 per barrel in the short term.

The escalating military conflict in the Middle East, which saw Israel retaliate against Hamas, raised concerns about oil supply disruptions and bolstered Brent crude to $87.72 a barrel while U.S. crude climbed to $86.07 per barrel. Gold prices also appreciated by 1.1% to $1,852 an ounce.

In currency markets, the yen gained ground, but the overall movements were modest. The euro eased 0.3% against the yen and 0.3% against the dollar.

The cautious sentiment benefited sovereign bonds after recent heavy selling, with 10-year Treasury futures rising significantly. Yields were indicated around 4.74%, compared to 4.81% on Friday.

Concerns grew about the impact of rising oil prices on consumers and inflationary pressures, leading to a decline in equity futures.

S&P 500 futures shed 0.8%, Nasdaq futures lost 0.7%, and European futures slipped as well.

Despite Tokyo’s closure, Nikkei futures were down 1.0%, and MSCI’s Asia-Pacific shares outside Japan remained flat.

The strong U.S. jobs report heightened expectations of prolonged high-interest rates, with an eye on upcoming data regarding September consumer prices.

Developments in the Middle East could influence the Federal Reserve’s stance, possibly hastening a policy easing next year.

Fed fund futures implied an 86% chance of rates staying on hold in November, with 75 basis points of cuts priced in for 2024.

China also returned from holiday with a flood of economic data while the Middle East conflict threatened to cast a shadow on the start of corporate earnings season, with companies like JP Morgan, Citi, and Wells Fargo reporting this week.

Goldman Sachs anticipated modest sales growth and slim margin improvement in this environment.