By Craig Erlam
We’re seeing a little more risk-aversion in the markets at the start of the week which is understandable, considering the unfortunate events in Israel over the weekend.
The surprise attack by Hamas has fueled concerns about further instability in the Middle East which could in turn disrupt oil flows at a time when the market is already extremely tight and prices are high.
It’s natural in these circumstances for investors to take a risk-averse approach while they gain a better understanding of what the knock-on effects will be – for example with the WSJ claiming that the attack was aided by Iran – and what that will ultimately mean for the world economy.
It comes at a time when there is already enormous uncertainty going into 2024 with most central banks likely done with monetary tightening, but some still warning of more to come.
If economies aren’t already in or heading for recession, further hikes could tip them over the edge, and that has been weighing heavily on stock markets. We’ll hear from a wide array of central bankers this week which will be particularly interesting in light of Friday’s jobs report and ahead of this week’s US CPI data.
Oil remains higher amid risks to supply
Oil prices corrected sharply over the last week, but they bounced back strongly Monday morning. The attack on Israel has added additional risk premium to oil prices as the market is already extremely tight as a result of the OPEC+ output restrictions and this could in theory squeeze supply further.
The flip side is that OPEC+ would have the capacity to offset that should they so wish, although there’s no guarantee that would happen under the circumstances.
I’m not sure traders have faith in the group to intervene when price is high and supply short in the way they have been so willing to do in the alternative scenario.
Safe haven flows boost gold
Gold is higher at the start of the week, buoyed by some safe-haven flows against the backdrop of geopolitical uncertainty. The dollar is also stronger which is typically a headwind for gold, but it’s not proving particularly problematic.
The yellow metal has been under immense pressure in recent weeks as investors became increasingly unsure about the inflation and interest rate environment and yields soared. That appears to have steadied for now, but policymakers will have plenty of chance to calm nerves – or reinforce those concerns – this week.
The yellow metal rebounded just above $1,800 last week with further technical support seen between that level and $1,780. Ultimately, this hangs on what bond yields are doing and, based on Monday’s evidence, the threat of escalation in the Middle East.
Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA
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