Market faces sum of all fears as conflict breaks out in Middle East
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The breakout of conflict also saw oil prices spiking 6 per cent during the week.
PHOTO: AFP
Just when you thought things could not get much worse for the markets, they did.
The Middle East flare-up that began on Oct 7 will add upside pressure on oil prices, contribute to inflation and force central banks to remain in hawkish posture. If it expands into a regional conflict, it could push the world economy into a recession.
Meanwhile, the 3.7 per cent rise in the United States’ September consumer price index (CPI) versus expectations of 3.6 per cent, coupled with a better-than-expected jobs report, could prompt the Federal Reserve to kick the rate-cut can further down the road. But core CPI inflation fell to 4.1 per cent, in line with expectations.
The breakout of conflict also saw oil prices spiking 6 per cent during the week. Energy prices could hit new year-highs if this becomes a regional conflict.
Mr Stephen Innes, managing partner at SPI Asset Management, wrote that the latest developments in the Middle East have compounded the geopolitical concerns for investors.
“They are already dealing with the repercussions of the Ukraine conflict and preparing for a potential escalation in the Middle East. Amid the fog of war, traders have been buying gold and oil, in a frenzied fashion, as their primary weekend hedges, anticipating a wider sphere of influence getting drawn into the current Middle East crisis.”
JP Morgan chief executive Jamie Dimon reckons the world could be entering uncharted territory.
“This may be the most dangerous time the world has seen in decades,” he said last week as his bank unveiled a net profit of US$13.15 billion (S$18 billion) for the third quarter of the year, up from US$9.74 billion a year earlier.
Mr Dimon, like many others in the market, fears that the Ukraine war Israel-Hamas conflict
Despite all these uncertainties, markets climbed a wall of worry last week, owing largely to option trades and a technical rebound from oversold positions. Also helping were remarks last Friday by Philadelphia Fed governor Patrick Harker that he does not expect interest rates to be raised further.
In another development, the 10-year Treasuries pulled back slightly from their recent peaks. That said, bond yields remain at their highest levels in decades, with the 10-year and 30-year Treasuries just a whisker off the 5 per cent level.
The Dow Jones Industrial index snapped a three-week losing streak as it ended the week with a 0.8 per cent uptick to 33,670.29 points. Despite a negative close on Friday, the broader S&P 500 index ended the week almost 0.5 per cent higher.
Despite resilience by big technology companies, fear over the impact of higher-for-longer interest rates saw the Nasdaq index give up almost 0.2 per cent to 13,407.23 points.
In Singapore, the Straits Times Index tested the 3,230 highs of the previous week before ending with a net 0.4 per cent gain for the week at 3,185.79 points.
The Middle East situation remains highly precarious. Meanwhile, there is also that “small matter” of a potential government shutdown in the US in November as the gridlock on Capitol Hill continues.
We could see the market reacting to the sum of all fears in the coming weeks, especially if the Middle East conflict draws in other regional players.
Mr Vasu Menon, managing director for investment strategy at OCBC Bank, does not see last week’s gains being sustained.
“Markets regained some composure last week, partly due to the slightly oversold situation and rhetoric from Fed officials hinting that the Fed funds rate is close to a peak, as some of them reckon that the sharp rise in US bond yields and already tight financial conditions in the US may be enough to cool the economy and take some steam off inflationary pressure,” he said. “This helped to send US bond yields lower and lifted equity markets last week. But the relief may be short-lived as many of the headwinds that have spooked investors in the past few months remain intact.”
Blackrock Investment Institute noted that the markets are adjusting to the new regime. “This is not a typical business cycle – structural mega forces are shaping the outlook now, in our view,” it said.
The latest geopolitical developments will add upside pressure to oil prices, contribute to inflation and force central banks to remain in hawkish posture. That said, a better-than-expected jobs report points to a still-resilient US economy.
So what should investors do?
If history is any guide, this too shall pass. It is a matter of time.
“In this investment climate, investors will need to be bottom-up in stock picking and go for positions where there is a clear structural sector growth story, low debt and strong management teams,” advises Mr Thilan Wickramasinghe, head of regional research at Maybank.
Singapore Exchange (SGX) data shows that for the first nine sessions of October, the more growth-oriented sectors led the $108 million in net institutional fund inflows – banks, financial services (excluding banks), technology and telecommunications, materials and resources, and real estate (excluding real estate investment trusts, or Reits). The stocks that booked the highest net institutional fund inflows included OCBC Bank, DBS Bank, UOB, SGX, ST Engineering, CapitaLand Investment, UMS, ComfortDelGro, Venture, Frasers Logistics and Commercial Trust, AEM, UOL, StarHub, Sats, Singtel, Aims Apac Reit, YZJ Financial Holding, Frasers Hospitality Trust, iFast and Frencken.
Some analysts also note that a once-in-a-decade buying opportunity has arisen on the S-Reits front, where current prices suggest yields of well over 7 per cent on a historical basis.
The week ahead will see a slew of speeches by US Fed officials which will be dissected for clues about whether the Fed might surprise markets with a rate increase in the next two months. What Fed chairman Jerome Powell says when he speaks to The Economic Club of New York on Friday will be especially be significant, given the weight he carries with US monetary policy.
The US third-quarter earnings season starts to pick up this week, with 67 S&P 500 stocks reporting their quarterly results. Other developments worth watching are signs of any recovery in the troubled China economy.
The biggest worry for the market is how developments in the Middle East reverberate around the world.
