2023-10-10 04:05:15
The worst military conflict in 50 years between Israel and Hamas has erupted, and geopolitical tensions have increased, causing financial markets to begin to assess the possible impact of the situation in the Middle East on the next move by the US Federal Reserve (Fed).
Federal funds rate futures traders still predict that the Fed is more likely not to raise interest rates this year than to raise interest rates, which means that the U.S. benchmark interest rate is predicted to remain at a 22-year high of 5.25-5.50%.
According to data from the CME Group’s FedWatch tool on Tuesday (9th), the probability of suspending interest rate hikes in November rose to 88.5% from 72.9% on Monday, while the probability of suspending interest rate hikes in December increased from 72.9% on Monday 57.6% rose to 74%.
But there are big variables in this prediction. Traders, investors and even the Fed have made mistakes before, underestimating the tenacity of price pressures. If the fighting between Israel and Hamas triggers a rise in oil prices and in turn drives inflation to rise once more, it might also cause the market to overturn current forecasts.
Deutsche Bank chief strategist Henry Allen and research strategist Cassidy Ainsworth-Grace both warned that “stagflation” similar to the 1970s may return, referring to the worrying high inflation and low economic growth.
“It’s too early to tell whether Monday’s immediate market reaction will continue or accelerate,” said Randal Stephenson, head of international investment banking at FE. “Everything depends on how quickly and broadly this conflict expands.”
He said that if the conflict is limited to Israel and Hamas, it will not have greater consequences on the financial market in the long term, but if it spreads to other regions, it may cause oil prices to rise, push up inflation, and interfere with the work of the Fed.
In addition to forecasts that the Fed will no longer raise interest rates this year, financial markets can also see increased demand for U.S. 10-year and 30-year Treasury bond futures. The U.S. Treasury market will be closed on Monday for Columbus Day, which means yields on both are likely to fall when the spot market opens on Tuesday.
Driven by the need for hedging,goldthe US dollar rose on Monday, and oil prices soared more than 4% due to supply concerns. The three major U.S. stock indexes fluctuated during the session, and ended with small gains.
In addition to closely monitoring the development of the situation between Israel and Palestine, investors are also paying attention to the dovish remarks of Fed officials: the Fed’s second-ranking figure, Vice Chairman Philip Jefferson, and Lorie Logan, a voting member of the Dallas Federal Reserve Bank this year. On Monday, they all suggested that rising long-term U.S. Treasury yields would affect the financing costs of households and businesses, which may reduce the need for the Fed to further raise interest rates.
According to the Fed’s latest economic forecast, there may be one more interest rate hike before the end of this year, and inflation will not return to 2% until around 2026.
Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management, said his team is paying attention to the latest news from Israel. “These tragic news have had an impact on financial markets, and if the effect expands, it may bring more headwinds. We will watch the situation develop.” , and the potential impact on the market.”
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