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A look at the day ahead in European and global markets

By Wayne Cole, Chief Correspondent, Treasury

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Asian action has been dominated by news from Israel, with the usual safe-haven suspects getting a bid. With one war already raging in Europe, a new conflict in the Middle East was bound to rattle the markets.

Oil led the charge with gains of as much as 5% for Brent and U.S. crude, and just when prices had been on the retreat. Treasury futures also added a solid 13 ticks, though the cash market is shut in Asia for a Tokyo holiday.

Oil rigs are seen at Vaca Muerta shale oil and gas drilling, in the Patagonian province of Neuquen, Argentina January 21, 2019. REUTERS/Agustin Marcarian

The yen is up modestly on the safety bid, while the euro, in a region with high exposure to energy costs, is lagging. The U.S. is an oil exporter, after all. For equities, U.S. and Nikkei stock futures are down around 0.7%.

Analysts are pondering the implications of the Israeli conflict with Hamas, how long it might last and whether it drags in others.

Crucial will be the Israeli and U.S. responses to Iran, given its support for Hamas. The Wall Street Journal reports that Tehran helped to plan the attacks, although Iran’s mission to the United Nations said on Sunday that Tehran was not involved.

Up to now, Washington is seen to have taken a softer stance on the Iranian oil embargo as it tried to broker a grand peace deal across the Middle East. But that could change, particularly if U.S. citizens were killed in the fighting.

If the U.S. tightens enforcement of sanctions, CBA analysts estimate around 0.5-1.0% of world oil supplies could be affected, which would push Brent atop $100 a barrel.

A further risk would be whether Iran might try to disrupt oil shipping in the Strait of Hormuz, where 15-20% of the world’s supplies flow through.

A sustained rise in oil prices would be an unwelcome blow to inflation but also a tax on consumers, so the implication for interest rates isn’t straightforward.

Indeed, Fed fund futures have actually rallied, with a November hike now priced at just a 14% chance and a little more easing implied for next year – around 78 basis points in all.

The strength of last Friday’s payrolls report fit in with the “high for longer” narrative on rates, though the slowdown in wage gains also argued against another hike. That raises the stakes for the September CPI, which markets are hoping shows a further pullback in annual inflation.

This week also sees the start of third-quarter earnings season with 12 S&P 500 members reporting, including JPMorgan, Citi and Wells Fargo.

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