MidEast Tensions and Port Strike Create Uncertain Start to Q4, Reports Reuters

An Overview of the Market Landscape Ahead

As tensions in the Middle East escalate, U.S. port workers strike, and global industries face challenges, the final quarter of 2024 is shaping up to be more tumultuous for world markets compared to the relatively stable first nine months.

The fourth quarter began with a renewed direct conflict between Israel and Iran, following a year of intense strife in Gaza and Lebanon. This development disrupted previously stable energy markets and led to some risk assets being hedged as a precaution.

In addition to high political risks surrounding the upcoming U.S. elections, the resurgence of violence in the Middle East has introduced further anxiety into the markets, although most economic fundamentals remain largely positive.

On Wednesday, Iran announced the conclusion of its missile attack on Israel, barring any further provocations, while Israel and the U.S. pledged to retaliate against Tehran, heightening fears of a broader conflict. Nevertheless, the market’s response to this latest geopolitical event has been relatively muted thus far.

Oil prices briefly rose above $70 per barrel amid anticipation of Wednesday’s OPEC+ ministerial meeting, reverting back to levels seen earlier in the previous week. However, year-on-year declines in crude prices continue to suppress global inflation rates by nearly 20%.

No significant policy changes from OPEC are expected, with plans to increase output by 180,000 barrels per day starting in December. Additionally, Saudi Arabia warned that oil prices could fall to $50 per barrel if OPEC+ members fail to adhere to production targets.

In the U.S., the ongoing port strikes are likely to impact economic and inflation data crucial for policymakers, although the long-term effects remain uncertain, particularly for European automakers already facing difficulties.

Recent manufacturing surveys indicate a significant downturn in the global industrial economy. JPMorgan’s global factory index reflects the most severe contraction in activity this year, approaching levels last seen in the aftermath of the pandemic.

However, some positive signs emerged from the U.S. data, showing improved new orders and a decrease in factory input prices to their lowest in nine months. Coupled with increased job openings reported for August, the outlook for an economic ‘soft landing’ appears optimistic.

As key labor market data, including ADP’s private payrolls report, is expected later on Wednesday, equity markets remain relatively stable despite geopolitical tensions.

The stock market retreated less than 1% from record highs on Tuesday, with futures showing only minor changes ahead of the opening bell. The volatility index remained around 20, briefly creeping above this threshold for the first time in three weeks.

Safety demands in U.S. Treasuries due to the Iran incident have mostly stabilized, with 10-year yields around 3.75%, following fluctuations that brought them below 3.70%.

Gold prices remained steady, not reaching new highs despite the earlier developments. The dollar managed to maintain its strength, likely bolstered by safe-haven interest, particularly against the euro, which is facing increased speculation regarding European Central Bank easing measures.

With inflation in the eurozone dipping below targeted levels and the local auto sector struggling, many economists have adjusted their ECB forecasts, with most not anticipating further rate cuts in the immediate future.

Global market sentiment on Wednesday was mixed, with Asian stocks generally lower, particularly Tokyo’s market which faced a 2% decline. The yen, too, relinquished any safety appeal as Bank of Japan officials highlighted concerns regarding market instability before advancing further rate hikes.

While Chinese markets are closed for the rest of the week, Hong Kong’s stocks showcased some optimism, rebounding by 6% following the previous week’s economic stimulus announcements.

European stocks saw a slight uptick, but corporate news revealed that Nike withdrew its annual revenue forecast amid challenges in the market, leading to a 6% drop in its shares.

Key market developments to watch for on Wednesday include the U.S. ADP private payrolls report, results from the OPEC+ meeting regarding oil policies, and speeches from several Federal Reserve officials. Additionally, international political meetings, such as the one between Germany’s Chancellor and France’s President, will also provide insights into market directions.

As the economic landscape shifts, stakeholders will continue to monitor these pivotal events for implications on future market trajectories.