Oil’s Shadow Over World Markets Darkens

By Jamie McGeever

(Reuters) – Here’s a look at the upcoming day in Asian markets.

What comes down must go up.

Oil prices are on the rise, fueled by escalating fears of a deepening conflict in the Middle East, which is increasingly impacting global markets as the week comes to a close.

Recently, oil surged more than 5% on Thursday, marking its largest increase in a year and bringing its weekly gains to over 8%. If oil prices maintain their momentum on Friday, it will register its largest weekly increase since January of last year.

While it’s true that oil’s recent rebound is occurring from a relatively low base and prices are merely returning to levels seen a month ago, world stocks and investors’ risk appetite are beginning to feel the pressure.

Currently, oil prices are still approximately 10% lower than they were a year ago and have shown negative year-on-year performance since July. This situation has underscored the growing disinflationary pressures globally. Just a few weeks ago, oil was down nearly 30% year-on-year. If geopolitical tensions persist and oil continues to rise, investors may have to reassess their inflation expectations.

U.S. Treasury yields are climbing, and the yield curve is steepening, particularly at the longer end, indicating that longer-term inflation concerns may be entering investors’ minds.

For Asia, the positive effects of China’s recent stimulus efforts seem to be waning amid increasing headwinds from rising oil prices and risk aversion.

Another significant outcome of escalating geopolitical tensions is the rising safe-haven demand for the U.S. dollar, which reached a six-week high on Thursday and is poised for its largest weekly gain since April.

Combining higher Treasury yields with a stronger dollar does not present an appealing environment for Asian markets, especially on a Friday following a day when the regional index reached its highest level since January 2022.

The Asian economic calendar is light on Friday, featuring key releases such as consumer inflation data from the Philippines, retail sales figures from Singapore, and purchasing managers’ index reports for services and manufacturing from India and Hong Kong, respectively.

Global events are likely to influence market sentiment on Friday.

Investors in Asia may adopt a cautious approach ahead of the U.S. non-farm payrolls report for September scheduled for release on Friday morning. This report, along with data from October, will significantly impact expectations for interest rate cuts in early November.

Currently, there is a divided outlook in the rates futures market regarding whether the Federal Reserve will cut rates by 25 or 50 basis points.

Here are some key developments that could shape Asian markets on Friday:

• Philippines inflation (September)
• India services PMI (September)
• Singapore retail sales (August)