Mid-East turmoil continues to roil markets

A trader works on the floor of the New York Stock Exchange. — AFP

SINGAPORE: Oil spiked, equities sank and investors ran for cover as Israeli missiles rained down on Iran on the morning of April 19.

In Singapore, the Straits Times Index, which appeared poised to make further gains following a positive April 18, tumbled as the first news of the attacks hit the newswires.

By midday, the index was down almost 0.6%, but recovered somewhat to close a net 0.35% down at 3,176.51 points.

Across the region, Hong Kong’s Hang Seng, Tokyo’s Nikkei, Sydney’s ASX and Seoul’s Kospi were down by between 1.3% and 2.5% through the afternoon, though they recovered some ground before the close of trading.

In New York, Wall Street futures were in the red, while the CBOE Volatility Index –known as the fear index – stayed elevated.

All this came as geopolitical risk in the Middle East ratcheted up amid unconfirmed news reports that Israel’s missiles hit a site in Iran, while Iranian state media reported an explosion in the centre of the country.

Israel had previously said that it would retaliate to the Iranian drone and missile attacks.

Analysts said the latest reported explosions are of significance because Iran’s army air base and Isfahan’s airport are reportedly close to the explosion site.

Isfahan was one of the several launch sites for Iran’s drone and missile attack on Israel, which lends to speculation that Israel may be behind the latest explosion.

The question is whether it could lead to a wider conflict drawing in other parties in the Middle East.

Oil spiked to above US$90 per barrel, gold hit a new record high at almost US$2,400 per ounce, and the US dollar jumped to a multi-month peak.

In Singapore, stocks fell across the board, with the largest losers including AEM, Mapletree Logistics Trust and ComfortDelGro.

Also down was Singapore Airlines, which slid 1.1% to S$6.25, in tandem with other global airline stocks.

Cathay Pacific was down about 1.4%, while Qantas sank 2.1%.

Airline earnings will be hit by rising fuel prices, and demand for travel could also be impacted if the conflict expands or sparks global terrorism at various travel destinations.

OCBC Bank managing director for investment strategy Vasu Menon said that in the short term, investors here will have to brace themselves for more volatility, and possibly more downside for regional markets and the local bourse, depending on how developments in the Middle East play out.

“Much will also depend on the direction of the US dollar, which may continue to strengthen against regional currencies given its safe-haven status amid tension in the Middle East,” he said.

“If the greenback strengthens, then regional currencies will weaken and so will regional bourses and the local markets.”

Meanwhile, Thilan Wickramasinghe, regional head of research at Maybank, said the sell-down could continue as investors assess the renewed uncertainty in the Middle East, on top of the US Federal Reserve’s (Fed) latest outlook on inflation and interest rates.

“This comes as hopes of early rate cuts by the Fed are fading, especially as inflationary risks rise from oil prices shifting north,” he said.

“We think investors should be weighted towards defensives in Singapore, with a track record of margin preservation amid cost hikes. We think banks, telcos and tech manufacturing sectors could offer value, earnings visibility and downside protection.”

Kelvin Tay, regional investment strategist for Asia-Pacific at UBS, said geopolitics would not usually have a long-lasting impact on asset prices.

“Capital markets are driven mostly by fundamentals, especially in the commodity space,” he said

Some analysts, like John Cheong of UOB Kay Hian, reckon that over the medium term, a contained Middle East conflict will have limited financial impact on Singapore Exchange stocks.

“In fact, oil and gas-related names, such as RH Petrogas, Rex, Marco Polo Marine, Beng Kuang Marine, Atlantic Navigation and Mermaid Maritime, could benefit from higher oil prices.”

Whatever the case, the last thing the market needs now is more geopolitical jitters, following Fed chief Jerome Powell’s recent remarks suggesting that the US central bank was not satisfied with the latest inflation numbers, and could delay rate cuts.

Some in the market now think that instead of a cut in June, the Fed might even hike up rates by 25 basis points in the face of sticky inflation and pressure on prices as supply chain choke points build up amid the conflict in the Middle East and elsewhere.

Market nerves had been slightly pacified towards the later part of April 18, as there were vague indications from both the Israeli and Iranian sides that evening that they were willing to draw a line under this episode, after having lobbed missiles at each other. — The Straits Times/ANN

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