Global markets brace for more volatility amid Israel-Hamas war

Introduction: Global markets brace for more volatility amid Israel conflict

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Concerns over further escalation in the Middle East are keeping investors cautious, more than a week after Hamas’s devastating attack on Israel.

Global markets are bracing for more volatility, as Israel prepares for a likely ground offensive into Gaza, and hundreds of thousands of Gazans move to the southern part of the Gaza Strip.

Fears that the Israel-Hamas war will develop into a regional conflict have pushed up energy prices over the last week.

Brent crude oil is trading over $90 per barrel this morning, up from $85 per barrel on 6th October, the day before Hamas’s attack.

Oil has climbed on concerns of supply disruptions, with Israel having temporarily closed its Tamar gasfield last week.

Chris Weston, head of research at Pepperstone, explains:

The focus has been rerouting that gas from the Leviathan gasfields in the north of Israel – if the market feels this gas field could be impacted then could see a spike in EU natural gas.

Many energy experts see the risk of a supply event here as fairly low, but should developments escalate on various fronts, then the market will increase the possibility of a disruption.

Most Asia-Pacific stock markets have fallen today, as risk sentiment is hit by concerns over the Israel-Hamas war.

Japan’s Nikkei has lost over 2%, while China’s CSI 300 index is down 1.1%, and South Korea’s Kospi 200 is 0.7% lower.

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Asia-Pac stocks begin negative as attention remains on the Israel-Hamas conflict which threatens to spill over to neighbours in the region: ASX 200 (-0.2%), Nikkei 225 (-1.4%), KOSPI (-0.3%)

— Newsquawk (@Newsquawk) October 16, 2023

Reports that the US is planning to tighten sweeping measures to restrict China’s access to advanced semiconductors and chipmaking gear are also hitting shares in Asia.

Traders are edgy, rather than panicking, about the situation in the Middle East, noting that the US secretary of state, Antony Blinken, said yesterday that Arab states have a “determination” that the conflict doe not spread.

There are also reports that American and Israeli officials are discussing the possibility of a visit to Israel soon by US President Joe Biden.

Jim Reid, strategist at Deutsche Bank, says:

In the overnight session there has been some relief that a ground offensive hasn’t begun yet in Gaza and that diplomatic channels seems to be open for now.

President Biden is considering a trip to Israel in the next week which will be an important event.

John Velis, foreign exchange and macro strategist at investment bank BNY Mellon, predicts geopolitical tensions will push up the US dollar, telling clients:

Given rising geopolitical risk in the Middle East, we see the dollar’s safe-haven bid returning and so sideline our more fundamental-based reservations about limited dollar upside.

Also coming up today

European finance ministers will discuss the economic outlook when they meet for a Eurogroup meeting today. US Treasury Secretary Janet Yellen is expected to attend, too.

Sam Woods, deputy governor of Prudential Regulation at the Bank of England, will speak at the City Banquet, at London’s Mansion House.

The agenda

9am BST: Italian inflation report for September
9.30am BST: Bank of England chief economist Huw Pill speaks about the ‘the current economic outlook.
Today: Eurozone finance ministers hold a Eurogroup meeting
9.10pm BST: Sam Woods, CEO of the Prudential Regulation Authority, gives speech at the City Banquet, Mansion House

Key events

European government bond yields are rising this morning, as traders consider how long inflation will remain high.

Germany’s 10-year bond yield, the benchmark for the euro area, has gained 4.5 basis points (bps) to 2.78%.

Yields measure the rate of return on the bond, and rise when price fall.

Over the weekend Joachim Nagel, the head of Germany’s Bundesbank, warned that the European Central Bank can’t declare that its fight against inflation is over just yet.

Nagel, a member of the ECB’s governing council, said the ECB will make sure interest rates are “sufficiently high for sufficiently long,” adding:

“The inflation beast has to be tamed.”

UK house prices rise at slowest post-summer rate since 2008 crash

There are fresh signs today that the UK’s housing market is cooling, under the weight of high interest rates.

Rightmove has reported that asking prices are rising by the weakest amount for this time of year since the 2008 financial crisis.

The average new asking price rose by 0.5% in the month to 7 October to £368,231, its data shows. However, the price of houses being sold dropped by 0.8% in the 12 months to early October, with the number of agreed house sales down by 17%.

Here’s the full story:

Victoria Scholar, head of investment at interactive investor, says,

14 consecutive rate increases from the Bank of England have taken their toll on mortgage appetite and house prices while sellers are less incentivised to list their properties online.

The shortage of available housing supply and sky-high rental costs means that the number of buyer enquiries per listed property remains elevated at 8% above pre-covid levels.”

Realisation dawns on sellers that this isn’t the mkt to be overly greedy – listing their properties at the lowest price inc (0.5%) in Oct 23 since 08, making the avg ASKING price £368,231. Leaving any unrealistic wiggle room thou could be at the detriment to a sale @rightmove pic.twitter.com/OPkl2o1EuU

— Emma Fildes (@emmafildes) October 16, 2023

Polish stocks and zloty rally after exit poll

Over in Poland, shares are rallying after an exit poll suggested a coalition of opposition parties could be heading to power after last weekend’s election.

The poll suggested the ruling Law and Justice (PiS) party had won the most votes, but that a combined opposition coalition led by former prime minister and European Council president Donald Tusk could form the next government.

Tusk was quick to declare victory last night, claiming:

“It’s the end of the evil times, it’s the end of the PiS rule, we made it,”

Poland’s WIG 20 equity index jumped as much as 4.9%, before settling 2.6% higher.

The zloty has also strengthened on the foreign exchange markets:

Bartosz Sawicki, market analyst at Conotoxia fintech, explains why the markets like the sound of a Tusk win:

Forming a pro-European government that would prioritize the rapid unlocking of funding for the National Recovery Plan worth €35bn would reduce the political risk premium.

The weak growth of Poland’s main trading partners and the gradual recovery of consumption point to an inevitable shrinking of the current account surplus.

An increased flow of EU funds would help the economy regain traction and cement a favourable balance of payments dynamics. A rapprochement with Brussels would be undeniable, but a potential presidential veto could hamper a breakthrough in reforming the judiciary system.

Larry Elliott

The similarities between 1973 – the year of the Yom Kippur war – and 2023 are “not exact”, our economics editor Larry Elliott writes.

He cautions, though, that “the idea that the world could again be on the brink of something nasty is inescapable”.

Having spent last week in Marrakech with the International Monetary Fund, and top finance ministers and economists, Larry warns:

It would be wrong to say that the IMF, the World Bank and the rich countries that dominate them are not worried. They are. The problem is they are not nearly worried enough.

Here’s the full piece:

European stock markets have opened a little higher, with the pan-European Stoxx 600 index rising 0.3% at the open.

The FTSE 100 index has gained 21 points, or 0.3%, to 7621.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says investors are in a defensive mood:

“As risk-off sentiment has been spreading, investors have been seeking more defensive positions amid fears of conflict escalating in the Middle East. The FTSE 100 looks set to benefit from higher energy prices with oil and gas prices dipping back but remaining at elevated levels, having jumped sharply over supply concerns.

Investors are braced for volatility ahead amid fears that Hezbollah militants could attack Israel over its operations in Gaza as forces ready for invasion. US Secretary of State Antony Blinken has been on a whistle stop tour of countries around the Middle East, stressing that all leaders want to see the conflict contained, but there is clearly still concern about the risks of contagion.

Although gold prices have dipped back a little, they remain a near month-long highs demonstrating the desire for safe haven assets. The Israeli Prime Minister’s vow to demolish Hamas is also helping keep the dollar strong, as investors desert riskier positions.

There are a few potential “pressure points” which the markets are sensitive to, reports Kyle Rodda, senior financial market analyst at Capital.com.

He suggests three potential scenarios which would escalate the conflict and cause volatility in the markets:

A potential ground invasion: volatility on Friday was set off by news that Israel is amassing troops on the border in preparation for a possible ground attack. There is uncertainty about whether this is a credible threat or if it represents posturing. On top of that, the scale and strategic intent of such an attack are unclear. Any attack would mark a significant escalation, which could prolong this major flare-up in tensions between Hamas and Israel.
The involvement of Iran: an unanswered question is still to what extent Iran supported and enabled the attack on Israel last weekend. The latest intelligence suggests that the Iranian regime was aware of an upcoming attack several months ago. However, there’s a lack of credible public information regarding whether Iran provided resources, participated in planning, or even directly participated in the attack, above and beyond their typical support for Hamas. If Iran is fingered, it raises the odds of more significant financial and trade sanctions; worse, it could spark military retaliation from Israel, which could embroil other actors.
Conflict on Israel’s Northern Border: Israel’s other adversaries may be emboldened by last week’s attack and look to take advantage of a weakened and distracted Israel. In particular, there have been reports of heightened activity around Israel’s border with Lebanon, with fears Hezbollah, in particular, could attempt to escalate its conflict with the country. Such an event would also raise the risk of broader regional hostility that draws in allies and adversaries on both sides.