Middle East violence rattles markets, oil jumps

LONDON (Reuters) – Oil surged, along with European defence stocks, while airline shares plunged after Israel pounded the Palestinian enclave of Gaza in retaliation for one of the bloodiest attacks in its history, unleashing fears of a wider Middle East conflict.

Fighters from Islamist group Hamas killed 700 Israelis and abducted dozens more as they attacked Israeli towns on Saturday, leaving hundreds dead, in the deadliest incursion into Israeli territory since Egypt and Syria’s attacks in the Yom Kippur War 50 years ago.

MARKET REACTION:

– Oil prices surged, with trading at $87.25 a barrel – up over 3% on the day.

– Israel’s shekel weakened sharply in early trading. The dollar was last up 1.75% at 3.906 shekels. Israel’s dollar and euro denominated bonds headed for their biggest daily fall in two years.

– The safe-haven dollar and Japanese yen edged higher. The was at 106.32, a touch firmer on the day.

– rose around 1% to $1,850 an ounce.

-Safe-haven bond prices rose, with U.S. Treasury futures up 0.3% and Germany’s 10-year Bund yield down 5 bps at 2.839%, moving off last week’s highs.

– An index of shares in European defence companies rose 1.2%, while travel and leisure stocks dropped 1.2%, as the likes of British Airways parent IAG fell 5%.

COMMENTS:

MOHIT KUMAR, CHIEF EUROPE ECONOMIST, JEFFERIES, LONDON:

“The coming days are likely to be driven by geopolitical risks, rather than fundamentals. The scale of the attack and loss of lives imply that the response is likely to last for a few months, potentially till year-end. From a market’s perspective, key would be whether Iran gets drawn into the conflict and what happens to oil prices over the coming weeks.”

“For markets, the geopolitical risks add another uncertainty for investors when convictions are already low.”

CHRIS BEAUCHAMP, CHIEF MARKET ANALYST, IG GROUP

“As we saw following the start of the Russo-Ukrainian war, the focus will now be on attempting to assess the ramifications of the conflict, and whether it will widen to include other states.”

“Oil prices will be under the spotlight, with supply disruption fears providing a reason for Brent and WTI to rally.”

“However, a repeat of the 1973 oil price spike seems unlikely, given the diminished role of OPEC and a changed diplomatic landscape. U.S. and European futures point to a weaker open, though how much of this is down to profit-taking from Friday’s surge is hard to say. A risk-off mood could well prevail for the time being, at least until the scope of the conflict becomes clearer.”

CAROL KONG, CURRENCY STRATEGIST, COMMONWEALTH BANK OF AUSTRALIA, SYDNEY:

“USD and JPY strengthened modestly in the Asia session as markets reacted to Hamas’ assault on Israel. U.S. equity futures fell by 0.6%‑0.8%.  The cash US Treasury market is closed because the US and Japan are on holiday.”

“… the risk is higher oil prices, a slump in equities, and a surge in volatility supports the USD and JPY and undermine ‘risk’ currencies such as AUD and NZD.  A response by Iran in the Straits of Hormuz is the wild‑card for oil supply and currency reaction.”

MICHAEL HEWSON, CHIEF MARKET ANALYST, CMC MARKETS, LONDON:

“The events over the weekend and the Hamas atrocities in Israel, and the latter’s reaction to them and subsequent declaration of war, have prompted a move into the U.S. dollar, gold as well as a modest bid into bonds, as concerns over escalation risks move to front of mind.”

ALVIN TAN, HEAD OF ASIA FX STRATEGY, RBS (LON:) CAPITAL MARKETS:

“The current scope of the conflict has no direct impact on global oil supply, but the worry is that it might drag in Iran.”

“U.S. Secretary of State Blinken said over the weekend that there was no evidence of Iran being “directly involved” in the attack on Israel, but there is indeed a longstanding relationship between Iran and Hamas.”

IPEK OZKARDESKAYA, SENIOR ANALYST, SWISSQUOTE BANK, GENEVA:

“From a geopolitical perspective, this war is different from the one in 1973 because the political and the geopolitical landscape is unalike.

“First Arabic countries are not attacking Israel together.

“Second, OPEC countries do have spare capacity that they restrict willingly to maintain oil price at above $80 (per barrel), but they don’t necessarily think of tripling oil prices – which would only accelerate the energy transition.

“Third, yes, the U.S. could continue to tap into its strategic oil reserves to level out a potential price shock even though SPR is down to a 40-year low following the Ukrainian war and finally, the Ukrainian war and embargo on Russian oil are already in play and the West has little margin to impose another embargo on Arab oil.

“This being said, potential retaliation against Tehran is a serious upside risk for oil prices. We will keep an eye on developments, but don’t speculate on a full-blast rise in oil prices for now.”