Market Analysis

Oil rises as Middle East unrest causes stocks to sag

Amos Simanungkalit · 04 Oct 2024247.5K Views

Global stocks declined on Thursday, weighed down by muted trading activity across the U.S. and other key regions, while oil prices surged, driven by escalating geopolitical tensions in the Middle East.

Wall Street’s main indexes closed lower after a brief rise earlier in the session. New data revealed a rise in U.S. jobless claims, signaling some weakness in the labor market, though service-sector activity remained robust. Investors are now anticipating the September nonfarm payrolls report, scheduled for release on Friday.

The Dow Jones Industrial Average dropped 0.44% to 42,011.59, the S&P 500 fell 0.17% to 5,699.94, and the Nasdaq Composite edged down 0.04% to 17,918.48.

In Europe, stocks ended the day down 0.93% as weak business activity survey data across the region weighed on sentiment. MSCI’s global stock index fell 0.39% to 842.18.

Earlier in the Asia-Pacific region, shares (excluding Japan) dipped 1.3%, driven largely by a downturn in Hong Kong’s stock market after a sharp rally. Several markets, including mainland China and South Korea, remained closed for the day. In contrast, Japan's Nikkei climbed nearly 2% after newly elected Prime Minister Shigeru Ishiba, following a meeting with Bank of Japan Governor Kazuo Ueda, stated it was not the right time to raise interest rates.

Meanwhile, in the Middle East, Israel conducted airstrikes on Beirut following ongoing clashes with Iran-backed Hezbollah. When asked if he would support an Israeli strike on Iran’s oil facilities, U.S. President Joe Biden responded, "We’re discussing that," adding, “There’s nothing going to happen today.”

Oil prices surged, with Brent crude futures rising 5.03% to settle at $77.62 a barrel, and U.S. West Texas Intermediate (WTI) crude futures climbing 5.15% to $73.71.

“The fact that energy prices are up while most other assets are down suggests that today’s moves are largely driven by rising tensions in the Middle East,” commented James St. Aubin, Chief Investment Officer at Ocean Park Asset Management in Santa Monica, California. “There’s also some caution ahead of tomorrow’s jobs report.”

Gold prices remained flat as the U.S. dollar strengthened. Spot gold dipped 0.01% to $2,657.24 per ounce, while U.S. gold futures settled 0.4% higher at $2,679.20.

In the currency markets, the U.S. dollar index reached a six-week high, touching 102.09—the highest level since August 19. It last traded up 0.33% at 101.98. The euro was slightly lower at $1.1026, close to its Wednesday low of $1.10325, last seen on September 12.

The British pound weakened by 1.1% to $1.3122 after Bank of England Governor Andrew Bailey hinted in an interview with the Guardian that the central bank might take a "more aggressive" stance on rate cuts if inflation continues to decrease. Against the yen, the dollar strengthened 0.1% to 146.61.

U.S. Treasury yields increased following the jobless claims and service sector reports. Two-year Treasury yields rose to 3.7095%, while the benchmark 10-year yields climbed to 3.853%.

The market now suggests a 35% chance of a 50 basis point rate cut by the Federal Reserve in November, down from almost 60% last week. Around 70 basis points of easing are anticipated by the end of the year.

“There are a few uncertainties, including the U.S. election and the current volatility in the Middle East,” said Arun Daniel, Portfolio Manager at American Century Investments. “While investors remain cautious in the short term, we remain optimistic about the long-term outlook.”