Marketmind: MidEast tension keeps markets on edge

[October 16, 2023]  Although price moves remain contained in the absence of a dramatic weekend escalation, world markets are still on edge as Middle East tension builds without obvious resolution.

Disputed reports of a temporary ceasefire in southern Gaza partly stabilized jittery macro prices first thing on Monday. But Israel denied these, bombardment of the enclave resumed and the unfolding conflict continues to loom large over an otherwise packed events diary this week.

For investors, crude oil continues to be most sensitive to the risk of widening regional war and most capable of emitting shocks through other markets by reigniting both inflation and economic demand fears simultaneously.

For now, oil has reacted directionally as many would suspect, although the extent of its climb remains modest given the political stakes. U.S. crude hovered about $87 per barrel on Monday - marginally off highs hit late last week, still down some 8% from late September peaks, and little changed year-on-year. Yet the extent to which the backup in oil prices over recent months can impact wider economic sentiment was clear from the University of Michigan's household survey on Friday. It showed a drop in confidence this month alongside a sharp upward tilt in inflation expectations. But with U.S. Treasury bonds and the dollar also tending to benefit from Middle East anxieties, the picture becomes messy and suggests a more general retreat from risky assets like stocks is still the playbook on any rise in geopolitical heat. As with prior influential political narratives, weekends tend to be nervy periods when markets are closed or illiquid and Fridays a time for battening down hatches just in case. That appeared to be the case last week as oil prices, gold, the dollar and Treasuries gained into the close while stocks fell back. Wall Street stock futures and 10-year Treasury yields were marginally higher into Monday's open, however, and the dollar and stock volatility gauges ebbed a touch. The tension barrels into a week that would otherwise be dominated by the third-quarter corporate earnings season, as a mix of banking behemoths and mega cap tech stocks report through the week. Shares in JPMorgan, Wells Fargo and Citigroup rose on Friday after their quarterly profits trounced analysts' estimates with help from higher interest rates. With Bank of America, Goldman Sachs and Morgan Stanley due out later this week alongside the likes of Tesla and Netflix, there's a lot to chew on.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., September 11, 2023. REUTERS/Brendan McDermid/File Photo

And it's a big week for Federal Reserve watchers, as Fed chair Jerome Powell and numerous other Fed officials make public appearances before their latest pre-meeting blackout starts from next week. U.S. retail, industrial and housing data dominate the economic release slate. Elsewhere, Poland's zloty and stocks rallied on Monday after the country's ruling nationalists appeared to have lost a parliamentary majority in the nation's most pivotal election in decades - opening the way for opposition parties to take power and signaling better relations with the rest of the European Union.Key developments that should provide more direction to U.S. markets later on Monday:

* New York Fed Oct manufacturing survey; Bank of Canada Q3 business outlook

* Philadelphia Federal Reserve President Patrick Harker speaks

* Eurogroup finance ministers meet in Luxembourg, with European Central Bank President Christine Lagarde and ECB board member Fabio Panetta attending

* U.S. Treasury auctions 3-, 6-month bills

(By Mike Dolan, editing by Ed Osmond, [e-mail]. Twitter: @reutersMikeD)

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