The financial markets have experienced a tumultuous week, marked by an increase in Middle East tensions. Should this trend persist, global stocks are on track to record their most significant weekly decline since September, with the dollar reaching its highest point of the year.
The shift towards a more risk-averse sentiment in Asian markets was triggered by news of explosions in Iran and an Israeli military action. This comes on top of investors already being on edge due to underwhelming financial reports and statements from the Federal Reserve that suggest a more aggressive stance on interest rates.
Following these developments, the price of gold surged past $2,400 per ounce, Brent crude climbed above $90 a barrel, and there was a notable uptick in the demand for dollars and yen. This led to a downturn in stock prices and a rally in bonds.
Despite the initial lack of comprehensive details regarding the extent of the damage, the market's swift reaction highlights the unease as the weekend approaches. This incident exacerbates the already negative trajectory for the markets this week and signals a potential increase in commodity prices, further stoking inflation concerns.
Iran, being a significant player in the oil market as the third-largest OPEC producer, contributes 3% to the global oil supply. This year, oil prices have seen a 16% increase, while copper prices have risen by 14%.
John Williams, the President of the New York Federal Reserve, emphasized the possibility of needing to raise interest rates further to meet their objectives, a scenario the markets seem unprepared for. This statement comes as U.S. Treasury yields have fallen sharply, although the benchmark 10-year yields have increased by over 35 basis points this month, dampening hopes for rate cuts within the year.
The shares of TSMC, a leading Taiwanese chipmaker, fell by 6% after it revised its sector outlook downwards, affecting technology and chip manufacturing stocks worldwide.
The market's quick reaction to the yen and Swiss franc's gains indicates a readiness to reverse carry trades, which are vulnerable in such volatile conditions.
Although there are secondary economic reports scheduled for release, it is expected that geopolitical events will dominate market movements.
Significant events that may impact the markets include German producer prices, British retail sales, and earnings reports from American Express and Procter & Gamble.
