(Bloomberg) — The escalating Mideast war is testing global market resiliency anew as investors brace for the open of stock, bond and energy markets Sunday evening in New York.
Early signs point to a shift away from risk. The US dollar surged and the Swiss franc edged higher against major peers in early trading, while the Australian dollar led risk-sensitive currencies lower. Australian and New Zealand government bonds rallied when their respective markets opened.
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Benchmark equity indexes in Saudi Arabia and Egypt each slid more than 2% in Sunday trading, while Bitcoin was little changed as of 5 p.m. in New York. Futures on US stocks, Treasuries, oil and gold are set to begin trading at 6 p.m. New York time, offering the first broad gauge of investor sentiment.
Shaken by fresh anxieties over artificial intelligence and potential cracks in credit, all while trading at historically high valuations, markets now must contend with a spiraling military action in Iran and the broader region that threatens to destabilize global shipping and stanch travel. The impact on oil and inflation is a paramount concern in markets that last month saw US stocks post their worst drop since April.
WATCH: Bloomberg Intelligence’s Mike McGlone explains what the US and Israeli strikes on Iran mean for oil and commodities prices. Source: Bloomberg
“This is all coming at a fragile time as investors are becoming more cautious,” said Dec Mullarkey, managing director at SLC Management. “US equity markets are already very sensitive to threats of technology disruption and emerging credit stress, so the prospects of higher commodity prices could force a selloff as investors rein in risk.”
Bloomberg Economics said a prolonged Middle East conflict raises the likelihood of crude reaching $80 a barrel and estimated that if the Strait of Hormuz is closed, then it could trigger a spike as high as $108. About one-fifth of global oil flows pass through the waterway, making it a critical energy choke point.
Brent crude prices closed at $72.48 a barrel on Friday.
Digital signals indicate that oil-tanker traffic through Hormuz has nearly halted, and three ships were attacked near the mouth of the Persian Gulf, heightening fears that supplies could tighten. Iran has said it doesn’t intend to shut the passage.
“Even without a formal closure of the Strait of Hormuz, the reality is that vessels rerouting and sharply higher insurance premiums effectively tighten supply conditions,” said Dilin Wu, a strategist at Pepperstone. “That alone embeds a fresh inflationary impulse into the global economy.”
On Hyperliquid, a crypto exchange that has emerged as one of the largest venues for derivatives known as perpetual futures, an oil-linked contract climbed more than 4% to $90.99 a barrel in mid-afternoon New York trading. Gold rose 1.10% to $5,379.60 an ounce while silver was changing hands at $96.65 per ounce, up 1.88% over the past 24 hours.
The contracts trade around the clock and have become a popular way to speculate across markets outside traditional hours. They are typically settled in USDC, a stablecoin pegged to the US dollar.
“Crude oil prices are poised to surge when markets open on Monday,” Elias Haddad, global head of markets strategy at Brown Brothers Harriman, wrote in a note to clients. “However, investors should lean against overshoots in crude oil prices as global oil production continues to outpace global demand.”
Bigger Risks
While markets have often shrugged off geopolitical flare-ups — with stocks barely reacting to US strikes on Iranian nuclear sites in June — there’s a bigger risk that this conflict could hit the global economy as the turmoil deepens, wrote Ajay Rajadhyaksha, global chairman of research at Barclays Plc. He cautioned against buying any sudden dip in equities.
“The risk-reward doesn’t seem compelling,” he said. “If equities pull back enough (say over 10% in the S&P 500), there is likely to come a time to buy. But not yet.”
What Bloomberg strategists say …
“The market impulse after the weekend events will be risk-off, and there’s likely to be less appetite for dip-buying at least until further clarity emerges about the scope and duration of the conflict.”
—Michael Ball, Macro Strategist, Markets Live. For the full analysis, click here.
Energy and defense stocks will likely rally when equity trading gets underway, said Joe Gilbert, portfolio manager at Integrity Asset Management. Shares of Saudi Aramco, the state-run oil producer, climbed 3.4% on Sunday, the biggest jump in more than four months.
Any long-lasting oil price spike would muddy the case for Treasuries. While a flight to safety in markets would cause yields to fall, higher energy prices that feed through the economy and stoke inflation drive them higher.
“I’d expect yields down 5 to 10 basis points at a minimum on the initial move,” said Maxence Visseau, Dubai-based director of research at investment firm Arkevium. “But the complication is oil. If crude spikes toward $80 to $90 on any Hormuz disruption, the long-end gets caught in a tug of war between safe-haven demand and repricing of inflation expectations.”
Some of the main moves in markets:
Currencies
The euro fell 0.3% to $1.1774 as of 6:52 a.m. Tokyo time
The Japanese yen was little changed at 155.99 per dollar
The offshore yuan fell 0.3% to 6.8841 per dollar
The Australian dollar fell 1.2% to $0.7033
Bonds
Cryptocurrencies
Bitcoin fell 1.6% to $65,685.8
Ether fell 1.5% to $1,928.83
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Natalia Kniazhevich, Sid Verma and Muyao Shen.
