In response to heightened tensions in the Middle East, markets are once again on edge as Israel launched strikes on Iranian targets overnight. This move follows Iran’s missile and drone attack last Saturday, sparking concerns of retaliatory actions and a potential escalation of conflict in the region.
Reports of Israel’s strikes prompted a rally in safe-haven assets, with gold briefly surpassing $2,400/oz and the Swiss franc and Japanese yen strengthening across the board. Oil prices surged, pushing WTI and Brent crude futures up by approximately 4.0%. However, as more details emerged about the strikes, including Iran downplaying the severity of the attack, market panic began to subside.
Israel’s targeted missile strike near Isfahan and Iran’s claim of shooting down three drones suggest a localized confrontation, with potential implications for neighboring countries like Iraq and Syria. Despite the escalation, Iranian officials have indicated no immediate plans for retaliation, providing some relief to jittery markets.
While efforts from the US and its allies to temper Israel’s response have had some effect, broader market sentiment remains subdued amid a confluence of challenges. Geopolitical uncertainties in the Middle East are compounded by concerns over Federal Reserve policy and corporate earnings.
In the United States, expectations for multiple rate cuts have dwindled following hawkish remarks from Fed officials. New York Fed Chief John Williams and other FOMC members have hinted at the possibility of rate hikes, signaling a shift in monetary policy. Additionally, disappointing earnings reports from chipmakers have raised doubts about future demand, particularly impacting the technology sector.
The S&P 500 and Nasdaq have faced consecutive declines, with investor sentiment dampened by a lackluster earnings outlook and uncertainty surrounding Fed actions.
In foreign exchange markets, the US dollar’s status as a safe haven weakened, while US Treasuries attracted investors, leading to a decline in yields. The Swiss franc and Japanese yen gained favor amidst market volatility, with the yen’s surge potentially fueled by speculation of rate hikes by the Bank of Japan.
While geopolitical tensions remain a focal point, currencies like the euro and pound have maintained stability against the dollar despite economic data releases, indicating resilience amid market turbulence.
