The ongoing military conflict in the Middle East has sent oil prices soaring to their highest levels in years, as fears of supply disruptions and geopolitical instability gripped the markets. Israel launched a massive air strike on 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 violence has raised the risk of a wider regional war, involving Iran and its allies, that could threaten the global oil supply.

Brent crude, the international benchmark, jumped $4.24 to $88.82 a barrel, while U.S. crude climbed $4.26 to $87.05 per barrel. Analysts at CBA said that given the tightness already facing physical oil markets in the fourth quarter of 2023, an immediate reduction in Iran’s oil exports could push Brent futures above $100 a barrel in the short term. Iran is one of the world’s largest oil producers and exporters, and has been under U.S. sanctions since 2018.

Oil prices soar as Middle East conflict escalates, US stocks tumble
Oil prices soar as Middle East conflict escalates, US stocks tumble

US stocks slide on inflation fears

The surge in oil prices also weighed on U.S. stock futures, as investors worried about the impact of higher energy costs on consumer spending and inflation. The sizzling September U.S. jobs report, which showed the economy added 531,000 jobs and the unemployment rate fell to 4.8%, also raised the stakes for inflation figures later in the week. 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.

However, some analysts warned that inflation could remain elevated for longer than expected, as supply chain bottlenecks, labor shortages, and strong demand continued to put upward pressure on prices. This could force the Federal Reserve to tighten its monetary policy sooner than anticipated, or even hike interest rates again after raising them twice this year.

S&P 500 futures shed 0.8% and Nasdaq futures lost 0.7%, indicating a lower open for Wall Street later today. EUROSTOXX 50 futures slipped 0.4% and FTSE futures 0.1%, following the negative lead from Asia.

Asian markets mixed amid thin trading

Asian markets were mixed on Monday, as trading was subdued by holidays in Japan and South Korea. MSCI’s broadest index of Asia-Pacific shares outside Japan went flat, as Chinese blue chips dropped 1.1% on their return from holidays. The Chinese government has been cracking down on various sectors of the economy, such as technology, education, and property, causing uncertainty and volatility for investors.

The Australian market was an outlier, rising 0.6% to a record high, as higher oil prices boosted energy stocks and positive local data supported sentiment. Retail sales rose 1.3% in August, beating expectations of a 0.5% increase, while business confidence improved slightly in September.

The yen was the main gainer in currency markets, as investors sought safety amid the Middle East turmoil and rising oil prices. The euro eased 0.3% to 157.44 yen, while the dollar dipped 0.1% to 149.14 yen. The euro also eased 0.2% on the dollar to $1.0566.

The cautious mood was a balm for sovereign bonds after recent heavy selling and 10-year Treasury futures rose a sizable 11 ticks. Yields were indicated around 4.75% compared to 4.81% on Friday.


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