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Middle East violence rattles markets, oil jumps

Published 10/09/2023, 02:29 AM
Updated 10/09/2023, 12:40 PM
© Reuters. FILE PHOTO: Smoke rises following Israeli strikes in Gaza, October 9, 2023. REUTERS/Mohammed Salem/File Photo
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LONDON/NEW YORK (Reuters) - Oil surged, along with U.S. and European defense stocks, while airline shares plunged after Israel pounded the Palestinian enclave of Gaza in retaliation for one of the bloodiest attacks in its history, unleashing fears of a wider Middle East conflict.

Fighters from Islamist group Hamas killed 700 Israelis and abducted dozens more as they attacked Israeli towns on Saturday, leaving hundreds dead, in the deadliest incursion into Israeli territory since Egypt and Syria's attacks in the Yom Kippur War 50 years ago.

MARKET REACTION:

- Oil prices surged, with Brent crude trading at $87.94 a barrel - up around 4% on the day

- The S&P 500 was down 0.1%

- Israel's shekel weakened sharply. The dollar was last up 2.8% at 3.944 shekels, recovering somewhat after the Bank of Israel said on Monday it will sell up to $30 billion of foreign currency.

- Israel's dollar- and euro-denominated bonds headed for their biggest daily price fall in two years.

- The safe-haven dollar and Japanese yen edged higher. The dollar index was at 106.32, a touch firmer on the day, while the euro shed 0.6% against the yen.

- Spot gold rose around 1% to $1,850 an ounce.

- Safe-haven bonds gained, with U.S. Treasury futures up 0.3% and Germany's 10-year Bund yield down 5 bps at 2.839%, moving off last week's highs.

COMMENTS:

PAUL NOLTE, SENIOR WEALTH ADVISOR AND MARKET STRATEGIST, MURPHY & SYLVEST WEALTH MANAGEMENT, CHICAGO

“It’s the usual impact, and that is sell securities, so the markets are trading a little bit lower, and buy the safety of bonds and the dollar. That is the typical knee-jerk reaction to events like this. It’s probably a one, two-day event for the markets to trade this way... I am not sure that we start a new trend because of this."

SOLITA MARCELLI, CHIEF INVESTMENT OFFICER AMERICAS, UBS GLOBAL WEALTH MANAGEMENT

“In a downside scenario, the conflict could expand to draw in other nations, with the potential for greater disruption to oil supplies. The risks of the conflict dragging in Iran have increased, in our view.”

“In an already undersupplied oil market, disruptions to Iranian exports either through broadening conflict or tougher sanctions could have a significant impact on oil prices in the near term. Market participants are likely to watch for developments that might prompt the US administration to enforce stronger sanctions on Iranian crude exports.”

PETER SCAFFRIK, CHIEF EUROPEAN MACRO STRATEGIST, RBC CAPITAL MARKETS, LONDON:

"The uncertainty about what it means for the region means that oil is going up, and there is a bit of ‘risk off’ and hence, bond markets are performing and equity markets are down a little bit.

Whether or not that continues, remains to be seen. When you look at the pictures, you can’t help but feel sympathy for the people on the ground. But the market, if it doesn’t impact the wider economy, can easily shrug things off, even though it is obviously a very grim situation. In market terms, for me, this would need to escalate beyond the Israeli borders to have a much broader impact."

NORBERT RÜCKER, HEAD ECONOMICS AND NEXT GENERATION RESEARCH, JULIUS BAER, ZURICH:

"The geopolitical shock seemingly brings a boost in safe-haven flows, which raises oil and gold prices and could pressure yields."

The key question is how lasting these safe-haven flows are if this weekend has brought some tectonic shifts in the geopolitical landscape. There are very few signposts to date, but it seems as if the conflict erupted along the known conflict lines without an unusual and new involvement of other parties, surprising with its significant intensity."

FILIZ ERYILMAZ, CHIEF ECONOMIST, ALB YATIRIM BROKERAGE, ISTANBUL:

"If we consider the developments so far, I expect the demand for precious metals, especially gold, and safe havens will increase. Today we saw gold prices climb in the morning.

"For now, we should not expect a serious impact on stock exchange and markets. Even though there are partial selloffs in the U.S, Europe and Asia, we should not expect strong sell off for now."

BARTOSZ SAWICKI, MARKET ANALYST, CONOTOXIA, WARSAW:

“Unsurprisingly, the biggest shake-up in the currency market has been in the Israeli currency. The shekel has plunged by a maximum of almost 2% and is at its weakest level since 2016 against the recently strengthening US dollar.

"The USD/ILS pair started to retreat towards 3.90 after the central bank launched a $30 billion programme aimed at reducing the volatility of the shekel's quotations. These are the first interventions in about two years. Israel's foreign exchange reserves amount to more than $200 billion, equivalent to almost 39% of the country's GDP. Liquidity of the local market is to be further supported by up to $15 billion (through swaps)."

MOHIT KUMAR, CHIEF EUROPE ECONOMIST, JEFFERIES, LONDON:

"The coming days are likely to be driven by geopolitical risks, rather than fundamentals. The scale of the attack and loss of lives imply that the response is likely to last for a few months, potentially till year-end. From a market's perspective, key would be whether Iran gets drawn into the conflict and what happens to oil prices over the coming weeks."

"For markets, the geopolitical risks add another uncertainty for investors when convictions are already low."

CHRIS BEAUCHAMP, CHIEF MARKET ANALYST, IG GROUP

"As we saw following the start of the Russo-Ukrainian war, the focus will now be on attempting to assess the ramifications of the conflict, and whether it will widen to include other states."

"Oil prices will be under the spotlight, with supply disruption fears providing a reason for Brent and WTI to rally."

"However, a repeat of the 1973 oil price spike seems unlikely, given the diminished role of OPEC and a changed diplomatic landscape. U.S. and European futures point to a weaker open, though how much of this is down to profit-taking from Friday's surge is hard to say. A risk-off mood could well prevail for the time being, at least until the scope of the conflict becomes clearer."

CAROL KONG, CURRENCY STRATEGIST, COMMONWEALTH BANK OF AUSTRALIA, SYDNEY:

"USD and JPY strengthened modestly in the Asia session as markets reacted to Hamas’ assault on Israel. U.S. equity futures fell by 0.6%‑0.8%.  The cash US Treasury market is closed because the US and Japan are on holiday."

"... the risk is higher oil prices, a slump in equities, and a surge in volatility supports the USD and JPY and undermine ‘risk’ currencies such as AUD and NZD.  A response by Iran in the Straits of Hormuz is the wild‑card for oil supply and currency reaction."

MICHAEL HEWSON, CHIEF MARKET ANALYST, CMC MARKETS, LONDON:

"The events over the weekend and the Hamas atrocities in Israel, and the latter’s reaction to them and subsequent declaration of war, have prompted a move into the U.S. dollar, gold as well as a modest bid into bonds, as concerns over escalation risks move to front of mind."

ALVIN TAN, HEAD OF ASIA FX STRATEGY, RBS (LON:NWG) CAPITAL MARKETS:

"The current scope of the conflict has no direct impact on global oil supply, but the worry is that it might drag in Iran."

"U.S. Secretary of State Blinken said over the weekend that there was no evidence of Iran being "directly involved" in the attack on Israel, but there is indeed a longstanding relationship between Iran and Hamas."

IPEK OZKARDESKAYA, SENIOR ANALYST, SWISSQUOTE BANK, GENEVA:

"From a geopolitical perspective, this war is different from the one in 1973 because the political and the geopolitical landscape is unalike.

"First Arabic countries are not attacking Israel together.

"Second, OPEC countries do have spare capacity that they restrict willingly to maintain oil price at above $80 (per barrel), but they don’t necessarily think of tripling oil prices – which would only accelerate the energy transition.

© Reuters. FILE PHOTO: Smoke rises following Israeli strikes in Gaza, October 9, 2023. REUTERS/Mohammed Salem/File Photo

"Third, yes, the U.S. could continue to tap into its strategic oil reserves to level out a potential price shock even though SPR is down to a 40-year low following the Ukrainian war and finally, the Ukrainian war and embargo on Russian oil are already in play and the West has little margin to impose another embargo on Arab oil.

"This being said, potential retaliation against Tehran is a serious upside risk for oil prices. We will keep an eye on developments, but don’t speculate on a full-blast rise in oil prices for now."

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