Stocks were down slightly today as geopolitical tensions in the Middle East compounded existing concerns about interest rates and inflation. The Dow Jones Industrial Average opened down roughly 0.2%, while the S&P 500 shed about 0.5%. The tech-heavy Nasdaq Composite didn’t fare any better, falling nearly 1% right out of the gate.
The weekend’s large-scale attack by Islamist militant group Hamas on Israel has rattled the markets. Investors are now grappling with the possibility of another full-blown conflict, adding to the ongoing war between Russia and Ukraine. Deutsche Bank strategist Jim Reid weighed in, stating, “Geopolitical risk doesn’t tend to linger long in markets, but there are many second-order impacts that could come through in the weeks, months, and years ahead from this weekend’s developments.”
Oil prices surged in the wake of the attack, jumping as much as 5%. The speculation is that key crude-producing countries could be dragged into the conflict, further destabilizing the market. Rebecca Babin, a senior energy trader at CIBC Private Wealth, noted, “Recently crude has been prone to overreact to geopolitical events and price increases have been short-lived. This situation may prove to be the exception,” highlighting the market’s sensitivity to potential supply disruptions.
The rally in oil prices is stoking inflationary fears, making investors brace for another interest rate hike by the Federal Reserve. While Israel’s role in the global oil supply chain is limited, the conflict threatens to involve both the U.S. and Iran, a significant source of extra crude this year. Any additional American sanctions on Tehran could tighten markets further.
The Strait of Hormuz, a critical passage for much of the world’s crude supply, is also in the spotlight. Reports suggest Iran helped plan the attacks, and any retaliation against Tehran could endanger the safe passage of vessels through this vital conduit. Iran denied involvement in the assault today.
Financial institutions offered varied takes on the conflict’s potential impact on crude prices. Citigroup analysts, including Ed Morse, said the hostilities reduce expectations that Saudi Arabia will cut its output curbs. Morgan Stanley took a more measured stance, not expecting a spillover into other countries and thus a muted longer-term impact on crude prices. Societe Generale SA estimated that heightened tensions could add a $5-$10 risk premium to crude prices. RBC Capital Markets analysts, including Helima Croft, suggested that Israel is likely to escalate its long-running shadow war against Iran, although Tehran’s response remains uncertain.
Investors are also digesting the implications of Friday’s hot September jobs report, which strengthens the case for a more restrictive monetary policy. The recent spike in bond yields to 16-year highs has rattled investors, putting additional pressure on stocks. However, some Fed officials believe the bond rout could tighten credit considerably, potentially giving the central bank reason to pause its rate hikes.
Looking ahead, the Consumer Price Index (CPI) for September is due on Thursday and is expected to show a small drop in headline inflation. Minutes from the Fed’s last meeting, set for release this week, should offer further insight into policymakers’ thoughts on the trajectory of interest rates. With trading in U.S. Treasuries closed today for the U.S. holiday, all eyes will be on these upcoming indicators.
