Stocks steady, oil rises as cautious investors eye Middle East hostilities

Stocks held firm on Wednesday and safe haven assets such as government bonds and the dollar rose, as investors pulled back from panic selling amid escalating Middle East hostilities that sent oil prices up nearly 3%.

Europe’s benchmark STOXX index fell just 0.1% and MSCI’s broad index of Asia-Pacific shares rose 1.38%, despite the prospect of wider conflict following Iran’s missile strikes on Israel and Israel’s incursion into Lebanon.

The safe-haven dollar is trading near its strongest in three weeks against the euro.

Macroeconomics also boosted the dollar, with a resilient US job market arguing for a Federal Reserve interest rate cut in November, and euro zone inflation trends supporting European Central Bank easing this month.

US S&P 500 stock index futures fell 0.4%, after the cash index lost 0.9% overnight.

Mainland Chinese markets were closed for the Golden Week holiday.

“In a chain of potential market volatility shocks, geopolitics will typically drive the response to economics, corporate earnings or the central bank – largely because most market players are vulnerable to price risk around these events,” said Chris Weston, head of research at Paperstone.

“While these events typically settle in a market-positive fashion, the risk they can pose is clearly significant,” Weston said. “The situation remains fluid, and a slight lull in rhetoric or increased aggression from Israel or Iran could have a significant impact on sentiment in the markets.”

Iran said early Wednesday that its missile attack on Israel had ended without further provocation, although Israel and the US vowed to retaliate.

Brent crude futures rose 2.71% to $75.55 a barrel, extending a 2.5% advance from Tuesday. US WTI futures rose 2.91% to $71.86 a barrel after Tuesday’s 2.4% gain.

“Speculation of an Israeli strike on Iranian oil fields seems unlikely, as such a move would likely push oil prices to $80 a barrel, upsetting Israel’s allies, who are pushing against inflation,” said IG analyst Tony Sycamore. said.

“Instead, strategic Israeli attacks on critical weapons factories and military objectives are more likely,” he said.

The cost of insuring Israel’s sovereign debt exposure against default has risen to its highest level in nearly 12 years, with five-year credit default swaps for Israel jumping 10 basis points to near their 160bps on Tuesday.

Fallout included

Asset prices elsewhere moved tentatively, suggesting that longer-term macroeconomic concerns now outweighed any persuasive investor reactions to events in the Middle East.

Gold fell 0.4% to $2,653.12 an ounce, bringing it closer to last month’s record high of $2,685.42 after rising more than 1% in the previous session, as a flight to the safe-haven dollar capped the precious metal’s gains.

The benchmark 10-year Treasury yield rose nearly 4 basis points (bp) to 3.7467%, as German counterparts shifted to the safety of government bonds.

The dollar index, which tracks the US currency against the euro and five other major rivals, was steady at 101.22 after pushing as high as 101.39 on Tuesday for the first time since September 19.

Europe’s shared currency was little changed at $1.1072, after falling 0.6% in the previous session, before falling to $1.1046 for the first time since Sept. 12.

Euro area data on Tuesday showed inflation fell below the ECB’s 2% target last month, which was set for Oct. Promotes bets for a quarter-point rate cut on the 17th.

Meanwhile, US data showed a solid economy overnight, a day after Fed Chair Jerome Powell pushed back against the possibility of another 50 basis point rate cut when the US central bank meets next month.

Job openings rose unexpectedly in August after two consecutive monthly declines, but hiring was soft and consistent with a sluggish labor market.

Private payrolls data is due later on Wednesday, ahead of a potentially crucial monthly non-farm payrolls number on Friday.

A crippling US dock strike, which could cost the economy $5 billion a day, will also be at the forefront of investors’ minds, with hopes for a quick end due to a lack of active negotiations overnight.