US stocks skid, oil surges on Middle East conflict

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Iranian supply disruptions pose a risk of pushing Brent futures above US$100/bbl in the near term.

Any sustained rally in oil prices would add to inflationary pressures, which would impact the equity market.

“The risk is higher oil prices, a slump in equities, and a surge in volatility supports the dollar and yen, and undermine ‘risk’ currencies,” said analysts at CBA in a note.“Given the tightness already facing physical oil markets in Q4 2023, an immediate reduction in Iran’s oil exports risks pushing Brent futures above US$100/bbl in the short term.”

The cautious mood was a balm for sovereign bonds after recent heavy selling and 10-year Treasury futures rose a sizable 11 ticks. Yields were indicated around 4.75% compared to 4.81% on Friday.Any sustained rally in oil prices would act as a tax on consumers and add to inflationary pressures, which weighed on equities as S&P 500 futures shed 0.8% and Nasdaq futures lost 0.7%.While Tokyo was closed, Nikkei futures were trading down 0.8% and near where the cash market ended on Friday.

Median forecasts are for a 0.3% gain in both the headline and core measures, which should see the annual pace of inflation slow a touch. Fed fund futures now implied an 86% chance rates would stay on hold in November, and had around 75 basis points of cuts priced in for 2024.

 

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