NEW YORK: Investors will seek signs in the coming week of how sprawling the war in the Middle East will become and how much it will disrupt energy supplies, as they chew over fresh inflation data.
A US-Israeli campaign against Iran that entered its seventh day last Friday is consuming markets, with a jump in oil prices headlining volatility across assets.
US stocks swung sharply following the Middle East escalation, leaving the benchmark S&P 500 down about 1.5% for the week. The Cboe Volatility index, Wall Street’s most-watched gauge of investor anxiety, last Friday hit its highest level since October.
Compounding the woes for stocks was last Friday’s weak US jobs report. The data for February showed a surprise drop in payrolls and the unemployment rate rising to 4.4%.
Investors are balancing the historic tendency for equities to rebound in the wake of major global developments against a lack of clarity about the Iran situation.
“This is a very big event and it seems incredibly uncertain where it’s headed,” said Rick Meckler, partner at Cherry Lane Investments. “To some extent, it’s left investors as neither sellers nor buyers.”
One focal point for markets was the surge in energy prices stemming from the conflict and its significance for inflation and economic output.
Brent crude last Friday topped US$90 a barrel, up from US$70 before the weekend strikes. Higher oil prices can dampen the outlook for equities in several ways, including by translating into higher petrol prices that weaken consumer spending.
In the near term, Michael Arone, chief investment strategist at State Street Investment Management, said changes in oil prices will be “a good barometer for whether risk assets will do well or they will do poorly.”
Oil breaching US$100 a barrel, he said, would be a psychological milestone that “would spook markets more.”
Even with the weekly decline, the S&P 500 remained roughly 3% from its all-time closing high set in late January. Expectations of a solid economic backdrop and strong corporate earnings growth this year have fed optimism for stocks, countering worries about artificial-intelligence-driven disruptions and private credit.
Heading into this week, “developments in the Middle East will move really all financial markets,” said Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth.
Inflation data will also be in Wall Street’s spotlight. The consumer price index (CPI) for February is due on Wednesday, following a cooler-than-expected January report for the closely watched inflation measure.
CPI for February is expected to show a 0.2% increase on a monthly basis, according to a Reuters poll.
Investors said markets may discount any report that is tame, because it covers a period almost entirely before the Middle East conflict. But a surprise spike in inflation could be particularly problematic.
“If we get upside surprises to the inflation data this week, that could further fuel fears about inflation expectations rising and that would be bad for markets,” Arone said. “The concern is that higher oil prices will only feed into higher inflation dynamics going forward.” — Reuters
