Middle East Conflict Rocks Markets – Brent Crude up 7%
Global markets experienced elevated volatility overnight as tensions in the Middle East continued to intensify, driving sharp intraday price swings across asset classes. Despite the unstable backdrop, US equity markets proved relatively resilient by the close. The Dow Jones slipped just 0.15% to finish at 48,904, the S&P 500 edged up 0.04% to 6,881, and the Nasdaq outperformed modestly, gaining 0.36% to close at 22,748. Currency markets delivered less conventional risk-off dynamics. Rather than benefiting from safe-haven demand, the Japanese yen and Swiss franc weakened, while the US dollar did rally as expected, with the DXY up 0.96% to 98.59. Fixed income markets came under pressure as inflation concerns intensified, largely driven by the sharp rise in energy prices. US Treasury yields surged across the curve, with the 2-year yield rising 10.2 basis points to 3.477% and the 10-year yield climbing 9.9 basis points to 4.036%. The move higher in yields saw market pricing for Federal Reserve rate cuts pared back further. Energy markets were the clear focal point of the session. Brent crude surged as much as 13% at its peak before settling 7.30% higher at $78.19 per barrel. WTI followed a similar pattern, gaining 6.46% to close at $71.35. Gold advanced 0.82% to $5,322.12, although the gains were relatively contained given the broader geopolitical uncertainty and recent moves that we have seen.
Dollar Regains Haven Status as Middle East Ignites
The dollar surged in trading yesterday as it reasserted itself as the go-to currency for haven trades in the wake of the huge escalation in hostilities in the Middle East. The dollar index added nearly 1% on the day, with the big surprise being the size of gains against the other traditional safe-haven plays, the Japanese yen and the Swiss franc. A Swiss National Bank update advising that it was willing to intervene certainly assisted that move – this was probably more influenced by the EURCHF than the dollar, which hit a 12-year low during early trading. The euro and cable look particularly vulnerable, with the euro finding support on the 200-day moving average and cable on the long-term daily trendline, and any breaks of these levels could see the move gather even more momentum. For now, any escalation of conflict should see more dollar buying against most of the majors, while any signs of calming could see the major pairs pop back into recent ranges.
Another Lively Day Ahead for Markets
Looking ahead, geopolitical developments will remain the dominant driver of sentiment. However, the macroeconomic calendar is also active, and traders will ignore them at their peril, as some found out yesterday, especially central bank updates. In the Asian session, RBA Governor Michele Bullock speaks early in the day, and the market is expecting to see a reaction in the Aussie dollar, especially given recent strong data updates. Later in the day, we hear from Bank of Japan Governor Kazuo Ueda, with an even greater expectation of currency movement associated with any updates given yesterday’s hawkish comments from Deputy Governor Ryozo Himino. The London session sees the release of Eurozone CPI data, followed by the UK’s Annual Budget release – always guaranteed to move sterling. The US session has little in the way of data releases, but we do hear from Fed members Williams and Kashkari, which could affect rate expectations that were volatile yesterday.
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