The global markets are on edge as the conflict in Israel continues to escalate, causing investors to seek safer assets and economists to warn of a potential global economic slowdown. The ongoing conflict in the Middle East has not only led investors to reevaluate their perspectives on global interest rates but has also caused traders to brace themselves for another week of volatile prices. With markets set to reopen at 5 a.m. Sydney time on Tuesday, the spotlight will be on currencies like the U.S. dollar, the Japanese yen, and the Swiss franc. Risk-sensitive currencies, such as the Australian dollar, may face renewed pressure after facing early sales at the beginning of the previous week. In addition, the price of gold reached its highest point since early March, reflecting the rising tensions in the region.
Aside from currency movements, the market will closely evaluate oil prices and Tesouro bonds following a tumultuous week. These bonds experienced some of their largest gains and losses in years, adding to the uncertainty and volatility in the market. Furthermore, Israel’s main stock index, the TA-35, resumed its downward trend on Sunday, mirroring the mounting concerns surrounding the conflict.
The Israeli military has recently announced its preparations for “significant ground operations” in Gaza, heightening fears of a larger-scale war in the Middle East. On the diplomatic front, the United States has been engaging in discreet discussions with Iran to caution against further escalation. U.S. Secretary of State Antony Blinken is scheduled to visit Israel for a second time on Tuesday as part of his Middle East tour, which also includes stops in Jordan, Bahrain, Turkey, Saudi Arabia, and the United Arab Emirates. These efforts by the United States aim to defuse tensions and prevent further disruption in the region.
According to Bloomberg Economics, a larger-scale war in the Middle East could potentially trigger a global economic recession. This concern adds to the growing list of investor worries, including whether the Federal Reserve will halt its interest rate hikes and how the lack of leadership in the United States Congress may lead to a government shutdown. Ed Al-Hussainy, Columbia Threadneedle’s global interest rate strategist, emphasizes that the deteriorating macroeconomic environment and significant interest rate fluctuations have set the stage for increased global volatility. While investors worldwide closely monitor the potential spread of the conflict between Israel and Hamas to other parts of the region, currency traders are now primarily focused on the actions of the Federal Reserve.
The Swiss franc has surged to its highest level against the euro in nearly a year, while the U.S. dollar continues its upward trend for the fourth consecutive week, despite moderate market volatility. The S&P 500 stock volatility has also increased, reflecting the growing uncertainty and concern among investors.
Uncertainty also persists within the United States, contributing to fresh market swings. The release of higher-than-expected inflation data last week has fueled speculation of another interest rate hike by the Federal Reserve, leading to the highest daily volume of 30-year bond sales since the outbreak of the pandemic.
Additionally, this month has witnessed the most anticipated price fluctuations in the world’s largest gold exchange-traded fund (ETF) since Bloomberg began collecting data in 2005. This further underscores the heightened level of uncertainty and volatility surrounding the Middle Eastern conflict.
In a separate context, the House of Representatives in the United States is currently without a leader. The Republicans have nominated Jim Jordan, who has received the endorsement of former President Donald Trump. However, Jordan faces substantial challenges in securing the position of Speaker of the House due to concerns over his extreme views from moderate Republicans.
However, amidst all this uncertainty, the Middle Eastern conflict remains the biggest unknown factor. “We’re all wondering where this is headed, but until we start to worry about oil supplies, the market will wait with its head held high,” says Rabobank’s chief currency strategist, Jane Foley. As the situation continues to evolve, market participants are keeping a watchful eye on developments to assess potential impacts and adjust their strategies accordingly.