Iran launched a ballistic missile attack on Israel Tuesday night after Israel killed Hezbollah leader Hassan Nasrallah and an Iranian commander in Lebanon. The Israel Defense Forces said its troops started launching new strikes against Hezbollah targets in Lebanon in response. The conflict escalation adds to inflationary risks as global central banks start to ease monetary policy.
Iran is OPEC’s third-largest producer, pumping out nearly 4 million barrels of oil per day. Oil prices spiked 5% after the missile strike before tapering to a 2% climb. “The markets really will not know where to turn,” said Stephen Roach, senior fellow at Yale Law School’s Paul Tsai China Center.
“We are likely to see significant increases in volatility and markets that really are whipped back and forth dramatically.”
Whether the markets’ risk-off move persists longer depends on factors like Israel’s response to Iran’s attacks, said Kelvin Tay, UBS Global Wealth Management’s regional chief investment officer. “If it’s a measured response, not designed to hurt and kill at a wide scale, things in the Middle East could actually settle a little bit.
Iran missile strike heightens Middle East conflict
You don’t get this escalation of fears of a region-wide war,” he said. Roach said the Middle East escalation brings upside risks to oil prices and inflation. “Central banks will certainly have to think twice about continuing down the path of further accommodation,” he noted.
Traders are also watching U.S. payroll data Friday for more indications on the economy after the Federal Reserve’s jumbo rate cut in September. A higher-than-expected unemployment rate could prompt the Fed to accelerate easing to achieve a soft landing. Another element that could propel further volatility is how long dockworkers’ strikes at U.S. East and Gulf coast ports last, Tay said.
Dockworkers from Maine to Texas have gone on strike over wage disputes and automation threats. “Any disruption of the port, any work stoppage at the port is going to have a very significant economic consequence and very quickly,” warned Peter Tirschwell of S&P Global Market Intelligence. “The longer this goes on, the quicker the economic damage will mount.”
