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SYDNEY/LONDON (Reuters) – Conflict in the Middle East lifted oil and safe-haven government bonds and hurt global stocks and Israeli assets on Monday after Friday’s sizzling September U.S. jobs report raised the rate stakes for inflation figures later in the week.
Israeli government bonds fell, with the 2120 ‘Hundred Year’ bond down 5.3 cents on the dollar at a record low. The shekel sank to its lowest since 2016 at 3.9880 per dollar, prompting the country’s central bank to offer to sell up to $30 billion of foreign currency to maintain stability.
That helped the shekel pare losses to 3.9195, while the central bank also said it would provide liquidity to markets as needed.
Israel pounded the Palestinian enclave of Gaza on Sunday, killing hundreds of people in retaliation for one of the bloodiest attacks in its history when Islamist group Hamas killed 700 Israelis and abducted dozens more.
“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,” said Peter Schaffrik, chief European macro strategist at RBC Capital Markets.
He said for a broader or lasting impact, the conflict would likely need to escalate beyond Israel’s borders.
“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.”
Brent crude rose by as much as $4 a barrel at one point and last traded up around $2, or 2.64%, at $86.80. [O/R]
U.S. S&P 500 futures fell 0.6% and Europe’s main stock index was flat
The cautious mood was a balm for sovereign bonds after recent heavy selling and 10-year Treasury futures rose a sizable 13 ticks. The cash Treasury market was closed on Monday for a U.S. holiday.
Germany’s 10 year Bund yield dropped nearly 5 basis points to 2.84%, retreating from last week’s 12-year high.
Gold was also in demand, rising around 1% to $1,850 an ounce. [GOL/]
FED FOCUS
The conflict in the Middle East comes at a time when markets are jittery and bond yields around the world are at multi-year highs.
A combination of capitulation by asset managers who had been long government bonds, rising oil prices, a deluge of government and corporate bond supply, and investors finally accepting that central banks will keep rates high for a long time has driven the bond sell off.
Friday’s blowout U.S. jobs report only added to the higher for longer rates view. Investors attention is now turning to Thursday’s September consumer price data, which could challenge expectations that the Federal Reserve will not raise rates further.
Median forecasts are for a 0.3% gain in both the headline and core measures, which should see the annual pace of inflation slow a touch
Minutes of the last Federal Reserve meeting are also due this week and should help gauge how serious members are about keeping rates elevated, or even hiking again.
Fed fund futures imply an 86% chance the Fed will hold rates in November, with around 75 basis points of cuts priced in for 2024.
China returns from holiday this week with a deluge of data including consumer and producer inflation, trade, credit and lending growth.
The news from the Middle East could sour the start of corporate earnings season with 12 S&P 500 companies reporting this week including JP Morgan, Citi, and Wells Fargo.
In currency markets the main gainers were the safe haven Japanese yen, Swiss franc and U.S. dollar. The dollar index, which tracks the greenback against six other major currencies, was up 0.18% at 106.4, while the euro fell 0.5% against the Japanese currency to 157.2 yen.
(This story has been corrected to say shekel milestone is lowest since 2016, not 2015, in paragraph 2)
