PETALING JAYA: Continued uncertainties on the geopolitical front will place markets in a limbo for the time being, with the bears not hesitant to rear its fangs with dramatic sell-offs seen in other regional stock markets.
For Malaysia, the FBM KLCI has by and large managed to absorb much of this volatility since the conflict broke out – with only one day of steep losses last Monday, where the benchmark index recorded its biggest intra-day loss of 2.55% since the war began.
SPI Asset Management’s managing partner Stephen Innes said oil price movements are seen to influence volatility on the markets for the time being.
“Risk sentiment is holding up for now, but markets are effectively trading with oil as the steering wheel for broader asset prices.
“As long as crude remains in the US$85 to US$90 per barrel range, equities can still lean on the idea that the conflict is contained.
“The real pressure point emerges if oil pushes above US$90 and starts drifting toward US$100, especially if it stays there for a month or two,” Innes told StarBiz.
“At that stage, energy costs begin to feed directly into inflation expectations and bond yields, thereby tightening financial conditions,” he added.
“Moreover, markets can usually absorb a brief oil spike, but a sustained, lengthy move toward US$100 crude tends to become a headwind for both stocks and bonds.”
Tradeview Capital’s portfolio manager Ng Tzyy Loon said some volatility in the near term is to be expected from the ongoing conflict in the Middle East, and what needs to be watched closely is the possibility of this conflict escalating into a major event – such as if the war expands beyond the Middle East.
“This could cause a global oil price spike, likely from the closure of the Strait of Hormuz.
“We believe bonds could serve as a primary safe-haven asset for some investors – however, bond movements may be affected by increased uncertainty surrounding the interest rate path under the incoming US Federal Reserve chair,” Ng told StarBiz.
Meanwhile, gold’s muted reaction has surprised some investors, and Innes said these movements are closely related to the macro environment as gold is trading at relatively “lofty levels”.
“The metal is trading less as a pure geopolitical hedge and more as a function of the US dollar and real yields.
“The surge in oil has nudged inflation expectations higher and pushed US yields up, while the dollar has stayed firm, a combination that tends to cap gold rallies in the short term,” Innes said.
“Investors have also been flocking to Treasury Inflation Protected Securities, which offer a direct inflation hedge with yield.
“Several recent flash crash episodes in gold also reminded traders that during periods of stress, the metal can be sold to raise liquidity and cover margin calls in other assets.
“Furthermore, over the medium term the structural bid from central banks and reserve diversification remains supportive, but in the near term gold is still being pulled around by the dollar and real yields rather than purely by geopolitics,” he added.
