Dollar Surges as Traders Brace for War Impact

5ar}r8v5r}o6dnnmab5h]8uk_media_dl_1.png Bloomberg

Article content

(Bloomberg) — The escalating Mideast war is testing global market resiliency anew as investors brace for the open of stock, bond and energy markets Sunday evening in New York. 

Article content

Early signs point to a shift away from risk. The US dollar surged and the Swiss franc edged higher against major peers in early trading, while the Australian dollar and South African rand led risk-sensitive currencies lower. Benchmark equity indexes in Saudi Arabia and Egypt each slid more than 2% in Sunday trading, with futures on US stocks, Treasuries, oil and gold set to begin trading at 6 p.m. New York time, offering the first broad gauge of investor sentiment.

Article content

Article content

Article content

Shaken by fresh anxieties over artificial intelligence and potential cracks in credit, all while trading at historically high valuations, markets now must contend with a spiraling military action in Iran that threatens to destabilize global shipping and stanch travel. The impact on oil and inflation is a paramount concern in markets that last month saw US stocks post their worst drop in 10 months.

Article content

Article content

“This is all coming at a fragile time as investors are becoming more cautious,” said Dec Mullarkey, managing director at SLC Management. “US equity markets are already very sensitive to threats of technology disruption and emerging credit stress, so the prospects of higher commodity prices could force a selloff as investors rein in risk.”

Article content

Bloomberg Economics said a prolonged conflict in the Middle East raises the likelihood of crude reaching $80 a barrel and estimated that if the Strait of Hormuz is closed, then it could trigger a spike as high as $108. About one-fifth of global oil flows pass through the waterway, making it a critical energy choke point. 

Article content

Brent crude prices closed at $72.48 a barrel on Friday. 

Article content

Article content

Digital signals indicate that oil-tanker traffic through Hormuz has nearly halted, and three ships were attacked near the mouth of the Persian Gulf, heightening fears that supplies could tighten. Iran has said it doesn’t intend to shut the passage. 

Article content

“Even without a formal closure of the Strait of Hormuz, the reality is that vessels rerouting and sharply higher insurance premiums effectively tighten supply conditions,” said Dilin Wu, a strategist at Pepperstone. “That alone embeds a fresh inflationary impulse into the global economy.”

Article content

While markets have often shrugged off geopolitical flare-ups — with stocks barely reacting to US strikes on Iranian nuclear sites in June — there’s a bigger risk that this conflict could hit the global economy as the turmoil deepens, wrote Ajay Rajadhyaksha, global chairman of research at Barclays Plc. He cautioned against buying any sudden dip in equities.

Article content

“The risk-reward doesn’t seem compelling,” he said. “If equities pull back enough (say over 10% in the S&P 500), there is likely to come a time to buy. But not yet.”

Article content

Energy and defense stocks will likely rally when equity trading gets underway, said Joe Gilbert, portfolio manager at Integrity Asset Management. Shares of Saudi Aramco, the state-run oil producer, climbed 3.4% on Sunday, the biggest jump in four months.