Oil, Bonds Fall as Investors Temper Mideast Bets: Markets Wrap

(Bloomberg) — Oil slipped with gold and government bonds as investors unwound some of the geopolitical risk premium factored into global markets after Israel stepped up operations in Gaza more cautiously than some had anticipated.

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Australian and Japanese equities fell while futures in Hong Kong pointed to declines. US contracts edged higher after the S&P 500 Index fell 0.5% on Friday, with risk appetite dented over worries about a persistently hawkish Federal Reserve, war in the Middle East and underwhelming corporate earnings.

Oil fell as much as 2.1% early Monday, paring gains from Friday. The Swiss franc, euro and Japanese yen were little changed versus the dollar as markets digested what Israel calls the second and longer phase of its war against Hamas. Gold slipped but remained above $2,000 an ounce, while US and Australian bond yields edged higher.

“As the conflict in the Middle East continues, we are on watch for a collision course between tight financial conditions and geopolitically driven risk aversion,” Eric Robertsen, global head of research and chief strategist at Standard Chartered Plc, wrote in a note to clients. “The potential for an escalation of geopolitical conflict in the Middle East continues to weigh on the market psyche, but for the moment it is rates volatility that is driving outflows from emerging market assets and developed market equities.”

Middle Eastern markets that opened on Sunday showed little sign of panic a day after Israel sent troops and tanks into the northern Gaza Strip. Israel’s TA-35 stock index rose 1.3%, trimming its loss to 11% since the Hamas infiltration on Oct. 7.

Historically, major price swings tend to be short-lived as geopolitical risks shift. But the possibility that the conflict ends up drawing in nations such as Iran and even the US may send oil prices soaring and sap investors’ risk appetite. The global stock market has already lost $12 trillion in value since the end of July as concern mounts that central banks’ “higher-for-longer” interest-rate policies may tip the global economy toward a recession.

“Markets face a very challenging backdrop at this juncture,” said Paul de La Baume, investment adviser at BNP Paribas (Suisse) SA. “Geopolitical events are adding more volatility and reducing visibility.”

Israel said it had hit hundreds of Hamas targets, including missile-launch posts, with Prime Minister Benjamin Netanyahu warning Saturday of a “long and difficult” war. The Middle East supplies about a third of the world’s oil. West Texas Intermediate remains below its highest point since the conflict broke out — just above $90 — as so far there’s been no real impact on global supplies.

“The market has discounted a relatively moderate scenario, in which the conflict is more or less restricted to the area,” said Francisco Quintana, head of investment strategy at ING Spain. “The tension is enough to raise energy prices, put pressure on inflation, and prevent central banks from relaxing.”

Quintana warned that “the internationalization” of the conflict “would place us very close to the scenarios of 1973.” That year, members of the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo against the US after the Arab-Israeli war, sending oil prices surging.

Fear Gauge

To be sure, 1970s-style stagflation remains a remote possibility. Major conflicts involving Israel and Arab neighbors in this century have had no lasting impact on oil, with crude prices unchanged in the first 100 days following the conflicts, according to Marko Papic, chief strategist at Clocktower Group.

The VIX index, known as Wall Street’s fear gauge, has increased to 21 from 13 in mid-September, but remains well below the 27 level hit in March when the collapse of several regional banks set off a market rout.

Still, should tension escalate, traders and strategists said, safe-haven assets, such as gold, Swiss franc and short-dated government bonds will continue to benefit. Gold has stood out as one of the biggest winners since the war started, rising almost 10% to more than $2,000 an ounce. Commodity currencies, such as the Colombian peso and Brazilian real, have also been best performing currencies , followed by the Swiss franc.

The intensified conflict in the Middle East comes at the start of a week with a slew of potentially market-moving events, including central bank meetings in Japan, US and the UK.

On Wednesday, the US Treasury Department will unveil its quarterly bond sales plan, an announcement that may determine whether the 10-year Treasury yields have the momentum to keep rising after surging to a 16-year high last week. The week will end with the US payroll report that may show job and wage growth slowed last month.

“If you believe current events will have a lasting impact on global societies, your required risk premium will go up,” said Jeroen Blokland, head of research firm True Insights. “Even though this impact is not easily measured, it should not be overlooked. Politics and political currents are becoming more polarized and more extreme.”

Key events this week:

Australian retail sales, Monday
Eurozone economic confidence and consumer confidence, Monday
Germany CPI and GDP data, Monday
Spain CPI, Monday
China’s key financial policy gathering day, a rare closed door event led by Chinese President Xi Jinping starts, Monday
European Central Bank’s Ignazio Visco speaks, Monday
Riksbank Governor Erik Thedeen speaks, Monday
Apple Inc. expected to unveil new Macs, Monday
Bank of Japan rate decision, Tuesday
Japan unemployment, industrial production and retail sales data, Tuesday
China non-manufacturing PMI and manufacturing PMI, Tuesday
Saudi Arabia GDP, Tuesday
Eurozone CPI and GDP data, Tuesday
Poland CPI, Tuesday
Chile industrial production and unemployment, Tuesday
Mexico GDP and international reserves, Tuesday
ECB’s Ignazio Visco speaks on final day as Bank of Italy governor, Tuesday
NATO Secretary General Jens Stoltenberg speaks at Nordic Council Session in Oslo, Tuesday
New Zealand unemployment, Wednesday
RBNZ publishes financial stability report, Wednesday
China Caixin manufacturing PMI, Wednesday
Indonesia CPI, Wednesday
India S&P Global India Manufacturing PMI, Wednesday
UK S&P Global / CIPS UK Manufacturing PMI, Wednesday
Federal Reserve rate decision, Wednesday
US Treasury quarterly refunding announcement, Wednesday
Brazil rate decision, Wednesday
South Korea CPI, Thursday
Malaysia rate decision, Thursday
Bank of England rate decision, Thursday
Norges Bank rate decision, Thursday
Eurozone S&P Global Eurozone Manufacturing PMI, Thursday
SNB President Thomas Jordan and Band for International Settlements chief Augustin Carstens speak, Thursday
China Caixin services PMI, Friday
Eurozone unemployment, Friday
US unemployment and nonfarm payrolls, Friday
Canada unemployment, Friday
BOE’s Jonathan Haskel speaks, Friday
BOE’s Huw Pill speaks, Friday