Israel crisis: Global investors on edge

Investors are watching for signs that the crisis in the Middle East may be escalate over the weekend, potentially ratcheting up volatility as investors await a Federal Reserve meeting and key US data in the week ahead.

Investors have grown more worried about a widening conflict in recent days after the US dispatched more military assets to the Middle East while Israel said, “it had entered its second phase of operations.”

Israel crisis causes worry

“The situation in Israel is … causing a lot of anxiety,” said Randy Frederick, managing director of trading and derivatives for Charles Schwab.

On Friday, Brent futures settled up 2.9 per cent at $90.48 a barrel on concerns the conflict could disrupt crude supplies. Spot gold, a popular safe haven for nervous investors, vaulted over $2,000 for the first time since mid-May.

In a note on Friday, analysts at Capital Economics said the oil market’s response to the conflict was “muted” so far.

“That said, any sign that the other countries in the region are becoming more involved in the conflict would cause oil prices to rise sharply,” they wrote.

If an escalation of the conflict causes the US to increase spending that raises the deficit, Treasury yields could rise beyond the 16-year highs they already have hit, said Peter Cardillo, chief market economist at Spartan Capital Securities.

Some investors also expect a widening conflict could prompt safe-haven buying of Treasuries. This could moderate the surge in yields, which move inversely to prices, and this in turn could ease pressure on stocks and other assets.

The S&P 500 has fallen more than 10 per cent since late July, when it reached its high for 2023, though the index is up over 7 per cent year-to-date.

“So far, US government bonds have not been performing their usual safe-haven function,” UBS Global Wealth Management said in a note on Friday.

“However, an escalation of the conflict would likely shift attention away from monetary policy concerns and boost safe-haven demand for Treasuries.”

Both gold and oil can also provide hedges against near-term volatility, they said.

The CBOE Volatility index has climbed in the wake of the conflict and rose on Friday, approaching seven-month highs.

The Federal Reserve is set to give its latest monetary policy statement on Wednesday, while Apple’s quarterly results highlights another busy week of corporate reports.