The Middle East war increased the price of oil and Treasury bonds, which caused U.S. stock futures to decline on Monday. Meanwhile, the hot September U.S. employment report elevated the stakes for inflation data later in the week.

The market was light due to holidays in Japan and South Korea, but the early demand was for bonds and the safe havens of the Japanese yen and gold, while oil prices increased by more than $3 per barrel.

At 3.9880 to the dollar, the Israeli shekel originally fell to its lowest level since early 2015, leading the nation’s central bank to offer to exchange up to $30 billion for shekels. The swift move allowed the currency to reduce losses to 3.9050, and the central bank also said it would support the markets with liquidity as needed.

“The risk is higher oil prices, a slump in equities, and a surge in volatility supports the dollar and yen, and undermine ‘risk’ currencies,” according to CBA analysts in a note.

They noted that there was a potential that the Iranian oil supply may be interrupted in particular.

“Given the tightness already facing physical oil markets in Q4 2023, an immediate reduction in Iran’s oil exports risks pushing Brent futures above $US100/bbl in the short term.”

In retribution for one of the worst attacks in modern history, in which the Islamist organization Hamas murdered 700 Israelis and kidnapped dozens more, Israel bombarded the Palestinian enclave of Gaza on Sunday, killing hundreds of civilians. Brent increased by $3.14 to $87.72 per barrel due to the threat of supply interruptions, while U.S. oil increased by $3.28 to $86.07 per barrel.

Additionally, gold increased by 1.1% in demand to $1,852 per ounce. The yen was the top gainer in the currency markets, even if total changes were small. The dollar fell by 0.1% to 149.14 yen, while the euro fell by 0.3% to 157.37 yen. Additionally, the euro lost 0.3% against the dollar to $1.0552.

After recent aggressive selling, the cautious atmosphere proved a salve for sovereign bonds, as 10-year Treasury futures increased noticeably by 12 ticks. Indicated yields were about 4.74%, down from 4.81% on Friday.

PREDICTING FED EASING

Any prolonged increase in oil prices would tax consumers and heighten inflationary pressures, which would impact the stock market and cause the S&P 500 futures to fall 0.8% and the Nasdaq futures to fall 0.7%. FTSE futures dropped 0.1%, and EURO STOXX 50 futures fell 0.4%. Nikkei futures were trading 1.0% down while Tokyo was closed, close to where Friday’s cash market finished.

MSCI’s largest index of Asia-Pacific equities outside of Japan (.MIAPJ0000PUS) remained unchanged despite a 0.6% decline in Chinese blue chips (.CSI300) on their return from vacation. The strength of the U.S. jobs report had raised anticipation that interest rates would need to remain high for longer, with data on September consumer prices posing another significant test. The headline and core measures are expected to increase by 0.3% on average, which could result in a slight slowdown in inflation’s annual rate.

The minutes from the most recent Federal Reserve meeting are coming this week. They should provide insight into how committed members were to maintaining current interest rates or raising them once more. Markets appeared to believe early on Monday that Middle East developments would be against more Fed rises and would speed a policy easing next year.

Fed fund futures indicated an 86% likelihood that interest rates would remain unchanged in November and that 75 basis points of reductions were priced in for 2024.

This week, China returns from vacation with a flood of statistics, including increases in consumer and producer inflation, trade, credit growth, and lending. The start of the corporate earnings season, which will see 12 S&P 500 corporations, including JP Morgan, Citi, and Wells Fargo, report this week, might be soured by the news out of the Middle East.

According to Goldman Sachs, sales will increase by 2%, margins will decline by 55 basis points to 11.2%, and EPS will be unchanged from last year. “Near-trend economic growth and moderating inflation pressures will support modest sales growth and slim margin improvement,” Goldman analysts wrote in a report.

“However, substantial margin expansion is unlikely given the ‘higher for longer’ interest rate regime, resilient wage growth, and AI investments among some tech firms.”