Oil prices saw a significant rally on Monday, accompanied by a strengthening of the dollar and yen, following a surprise attack by Hamas on Israel over the weekend.
The attack has heightened concerns about ongoing tensions in the Middle East.
The crisis has raised worries about the supply of crude oil from the region, a concern that comes at a time when supply worries are already elevated due to output cuts by Saudi Arabia and Russia.
Additionally, the conflict has reignited fears about inflation, as energy costs play a critical role in driving up prices. The situation poses a new challenge for central banks as they attempt to manage interest rate hikes while avoiding economic recessions.
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The surprise attack by Hamas and Israel’s declaration of war in response have resulted in over 1,000 casualties and have sparked concerns that the conflict could potentially draw in the United States and Iran.
“Key for markets is whether the conflict remains contained or spreads to involve other regions, particularly Saudi Arabia,” said ANZ Group’s Brian Martin and Daniel Hynes.
“Initially at least, it seems markets will assume the situation will remain limited in scope, duration, and oil-price consequences. But higher volatility can be expected.”
Both main contracts surged more than five per cent in early Asian business before easing back as the day wore on.
However, SPI Asset Management’s Stephen Innes warned: “Historical analysis suggests that oil prices tend to experience sustained gains after the Middle East crises.
“Meanwhile, stocks tend to eventually recover and trend higher after an initial period of volatility. Safe-haven assets like gold and Treasurys, which initially see gains during such crises, tend to fade from their initial price spikes as the situation stabilises.
“But with Middle East analysts considering this to be a pivotal moment for Israel, the view looks incendiary in any current scenario.”
A decidedly risk-off mood also saw investors push into the safety of the dollar, which was up against the pound and euro, as well as the Australian and New Zealand dollars.
The yen, considered one of the safest currencies, strengthened against the greenback, though it still remains locked around 11-month lows.
Gold, another key haven, gained around one per cent.
Equity markets were mixed, with Shanghai dropping on its first day back after a week-long holiday as investors continue to fret over the stuttering Chinese economy.
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There were also losses in Mumbai, Singapore, Manila, Bangkok and Wellington, though Hong Kong rose in shortened trade, having been closed in the morning owing to a typhoon.
Sydney and Jakarta eked out gains. Tokyo was closed for a holiday.
London edged up while Paris and Frankfurt were lower.
The tepid performance came despite a rally on Wall Street, where traders welcomed data showing a forecast-busting jump in new jobs but wage growth slowing.
The “Goldilocks” figures – neither too strong nor too weak – lifted optimism the world’s top economy can avoid a recession even as the Federal Reserve keeps rates elevated.
Still, there are worries the bank will hike one more time before the end of the year, with officials determined to bring inflation to heel and keep it at their two per cent target.