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NEW YORK, Oct 28 (Portal) – Investors are watching for signs that conflict in the Middle East could escalate over the weekend, potentially increasing volatility as investors look ahead to a Federal Reserve meeting and key U.S. data in the wait next week.
Prime Minister Benjamin Netanyahu said on Saturday that Israeli forces had launched the second phase of the Gaza war as they pressed ahead with ground operations against Hamas militants.
Investors’ concerns about a widening conflict have grown in recent days after the U.S. sent more military supplies to the Middle East, while Israel struck targets in Gaza and Hamas supporters in Lebanon and Syria.
“The situation in Israel … is of great concern,” said Randy Frederick, managing director of trading and derivatives at Charles Schwab.
On Friday, Brent futures rose 2.9% at $90.48 a barrel on fears the conflict could hit crude supplies. Spot gold, a popular safe haven for nervous investors, rose above $2,000 for the first time since mid-May.
In a note on Friday, analysts at Capital Economics said the oil market’s response to the conflict had been “muted” so far.
“However, any sign that the other countries in the region are becoming more involved in the conflict would lead to a sharp increase in oil prices,” they wrote.
If an escalation in the conflict leads the U.S. to increase war-related spending, increasing the deficit, Treasury yields could rise above 16-year highs already reached, said Peter Cardillo, chief market economist at Spartan Capital Securities.
Some investors also believe a worsening conflict could trigger purchases of government bonds as safe havens. This could ease the rise in yields moving inversely to prices, which in turn could ease pressure on stocks and other assets.
The S&P 500 has fallen more than 10% since late July, when it hit its 2023 peak, although the index is up over 7% since the start of the year.
“So far, U.S. Treasury bonds have not fulfilled their usual role as a safe haven,” UBS Global Wealth Management said in a statement on Friday. “However, an escalation of the conflict would likely divert attention from monetary policy concerns and increase safe-haven demand for government bonds.”
They said both gold and oil could provide hedges against short-term volatility.
The Cboe Volatility Index (.VIX) has risen in the wake of the conflict and rose on Friday, approaching a seven-month high.
The Federal Reserve will issue its latest monetary policy statement on Wednesday, while Apple’s quarterly results highlight another busy week of corporate reports.
Reporting by Lewis Krauskopf; Additional reporting by David Randall; Editing by Ira Iosebashvili, David Gregorio and Diane Craft
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