West Asia turmoil sparks investor concerns over oil price surge

As tensions escalate in the West Asia, investors around the globe are bracing themselves for potential market volatility, with a particular focus on the oil market and the risk of prices soaring even higher. The situation in the region remains fluid as Israel’s troops engage in a fierce battle with Hamas gunmen who crossed into Israel from Gaza. This has sparked concerns of a broader conflict that could embroil other countries, including Iran, and lead to a sustained increase in oil prices.

The S&P 500 has exhibited a mixed response, rebounding by 0.5 per cent, while Brent crude oil prices have surged approximately 4 per cent to reach $88.10 per barrel. Gold, a traditional safe-haven asset, saw an increase of 1.2 per cent to reach $1,854.10 per ounce.

Reuters quoted Mohit Kumar, Chief Europe Economist at Jefferies in London, as saying, “The coming days are likely to be driven by geopolitical risks, rather than fundamentals. For markets, the geopolitical risks add another uncertainty for investors when convictions are already low.”

Geopolitical events have typically had short-lived effects on financial markets. However, this escalating conflict comes at a time when investors are already grappling with significant uncertainty due to a historic sell-off in U.S. Treasuries and stock market volatility. Market experts believe that the repercussions of this conflict could exacerbate several ongoing trends that have weighed on risk assets in recent months.

One of the key concerns is the potential for a rebound in oil prices, which could negatively impact U.S. economic growth and threaten the “soft landing narrative” that has buoyed stocks this year. After months of steady increases, Brent crude reached its highest level since late 2022 in September, although prices had been retreating somewhat this month.

Tina Fordham, a geopolitical strategist and founder of Fordham Global Foresight, cautioned, “The worst-case scenario from a geopolitical risk perspective would be a full-scale confrontation between Israel and Iran. A return to the risk of direct military tensions – especially the risk of Israeli attacks on Iran’s nuclear facilities – would likely have systemic impact,” Reuters quoted her.  A widening conflict could keep oil prices elevated, potentially contributing to inflation, further complicating matters for central banks worldwide, including the Federal Reserve.

According to Reuters, Paul Nolte, Senior Wealth Advisor and Market Strategist at Murphy & Sylvest Wealth Management, emphasised, “All of this is going to circle around oil. Energy is going to be the key here as to whether the impact on the economy is going to be temporary or longer-lasting.”

While U.S. equities have been under pressure due to rising Treasury yields, with the S&P 500 down roughly 6 per cent  from its late July highs, yields on the benchmark 10-year U.S. Treasury bonds have reached their highest levels in over a decade and a half. The upcoming U.S. earnings season and inflation data scheduled for Thursday are adding to investor unease.

Reuters cited Emmanuel Cau, Barclays’ Head of European Equity Strategy, who indicated that he believed the situation was an additional cause for concern. He noted that the timing was less than ideal, citing that the commodity market was already under strain, and the bond market was similarly stressed.

Amidst the turmoil, shares of Israeli companies on Wall Street have seen declines, with companies like Mobileye Global and Solaredge Technologies both experiencing approximately 4 per cent  drops.

In the safe-haven government bond markets, concerns about renewed tensions in the West Asia have alleviated some of the selling pressure that had caused 10-year borrowing costs to rise across the U.S. and Germany. U.S. bond markets were closed on Monday, but U.S. Treasury futures showed an increase as investors sought safety.

Althea Spinozzi, Senior Fixed Income Strategist at Saxo Bank, noted that while heightened tensions in Israel might make U.S. Treasuries more attractive to investors seeking safety, the risk of rising commodity prices and impending Treasury auctions could limit any significant decline in yields. “Within this environment, we remain defensive and wary of duration,” Reuters quoted her as saying.

(With inputs from Reuters)