EMEA Morning Briefing: Markets to Focus on Rising Mideast Tensions

MARKET WRAPS

Watch For:

Unemployment data for EU; no major corporate trading updates expected

Opening Call:

European stock futures were higher despite a negative lead from Asian stock benchmarks and U.S. stock futures; the dollar and Treasury yields rose slightly; while oil futures rose and gold declined.

Equities:

Stock futures in Europe were tracking slightly higher early Wednesday as focus remains on escalating tensions in the Middle East.

The prospect of a widening war in the Middle East dragged major U.S. stock indexes back from records on Tuesday, while powering oil prices higher.

"Military conflicts can quickly escalate into a scenario that causes markets to sell off dramatically, with safe-haven assets such as gold and Treasurys seeing heavy inflows," said Quincy Krosby, chief global strategist at LPL Financial.

Current oil prices and stock-volatility measures suggest that traders aren't yet expecting an all-out war, Krosby added.

Meanwhile, data Tuesday showed that eurozone annual inflation fell to 1.8% in September, below the European Central Bank's 2% target for the first time since June 2021 and paving the way for a 25-basis-point interest-rate cut in October.

Forex:

The dollar was slightly higher against a basket of foreign currencies pushed higher by evolving global interest-rate expectations and by jitters about Iran's strike against Israel.

The dollar's gain against the euro is driven both by anxiety about the Middle East flare up and by lower-than-expected Eurozone inflation, fueling speculation about a forthcoming rate cut from the European Central Bank, analysts said.

Currency traders had already somewhat priced in the risk of an Iranian attack, Karl Schamotta of Corpay said. "The reaction does seem relatively well contained at this point."

Bonds:

Treasury yields were slightly higher early Wednesday.

Flight-to-safety flows into U.S. government debt left the 10-year yield lower for the second time in the past three sessions on Tuesday, as Iran launched a wave of retaliatory missile strikes on Israel.

Government bond yields were already dropping earlier in the day as concerns about a struggling European economy pushed the benchmark 10-year German bund yield down 8.8 basis points to 2.042%.

Geopolitical tensions were being treated as the "overriding factor" for market participants and triggered a flight to safety, said Tom di Galoma, head of fixed income at Curvature Securities LLC in New Jersey.

Energy:

Oil prices gained on rising Middle East tensions. The direct involvement of Iran, an OPEC member, increases the likelihood of oil supply disruptions, ANZ Research analysts said.

"Any sustained rally in oil prices will be determined by whether Israel responds to this latest move with its own direct attack on its military, infrastructure or its oil industry," the analysts said.

Iran produces about 3.2 million barrels per day of crude oil and perhaps 50% of that gets exported, so "if Israel knocks out some of Iran's capacity, oil markets would have to contend with reduced spare capacity in the marketplace" and a loss of 3.2 million barrels a day in a worst-case scenario, said Stewart Glickman, deputy research director at CFRA Research.

Meanwhile, OPEC+ is expected to proceed with a plan to begin unwinding some production cuts in December. A committee meeting of OPEC+ officials on Wednesday isn't expected to produce any major announcements.

Metals:

Gold edged lower in Asia. The overall outlook for gold remains driven by dovish monetary policies from several central banks and global economic uncertainties, said Li Xing, financial markets strategist consultant at Exness.

"With the Federal Reserve focused on labor market conditions, any significant developments in employment figures could drive additional volatility in gold prices throughout the week," the strategist said.

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Copper rose in Asia, exceeding the $10,000 benchmark. Prices are supported by the optimism over demand in China after Beijing announced several stimulus measures, ANZ research analysts said.

The prospect of further interest rate cuts has also supported sentiment. In the U.S., Fed Chair Jerome Powell has said that the central bank will continue to loosen monetary policy if the economy progresses as expected, ANZ analysts added.

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Iron-ore prices drifted lower at the start of China's Golden Week holiday, which runs through Oct. 7. Spot iron ore delivered to North China fell by 0.3% Tuesday to $108.00/metric ton, according to S&P Global Market Intelligence.

Prices for steelmaking coal are flat, with liquidity thin.

TODAY'S TOP HEADLINES

AI Could Help Solve Inflation, Federal Reserve Gov. Cook Says

Could advances in artificial intelligence be the key to help reduce U.S. inflation rates and keep them low? Federal Reserve Gov. Lisa Cook said Tuesday that she is onboard with the possibility that the latest technological advances could have long-term disinflationary benefits.

Speaking at the Technology-Enabled Disruption Conference organized by the Federal Reserve Banks of Atlanta, Boston, and Richmond, Cook said that she is closely monitoring recent developments in AI because the technology could begin to play a much larger role in improving labor productivity.

Israeli Response to Iran's Attack to Set Course of Widening War

As Israel weighs how to respond to Tehran's latest missile barrage, it could take a page from its previous playbook when, after days of deliberation, its military targeted a single Iranian military site.

Few expect Israel's response to be as narrow this time, posing a fresh test as the Biden administration seeks to avoid a new spiral of escalation.

Iran Attacks Israel. The Israeli Response Will Drive the Market.

Iran fired a barrage of missiles at Israel on Tuesday, prompting the price of oil to rise and stocks to fall. The attack did minimal damage, but employed roughly twice the number of ballistic missiles as a similar Iranian strike on Israel in April, according to the Pentagon.

Spy Mania Sows Fear Among Russia's Scientists

Think of Russia's most dangerous jobs and the role of research scientist doesn't immediately spring to mind. Coal miner, maybe. Or a deep sea diver on the Barents Sea oil rigs. The same kinds of jobs that are dangerous anywhere.

But over the past six years, at least a dozen scientists, many of whom conducted research in the field of high-speed aerodynamics or hypersonics, have been arrested. Some of the arrests were on suspicion of handing over scientific data to Moscow's rivals. The latest was sentenced to 15 years in prison.

Oracle to Invest $6.5 Billion in AI and Cloud Infrastructure in Malaysia

Oracle Corp. plans to invest more than $6.5 billion to establish a public cloud region in Malaysia, aiming to meet the country's growing demand for artificial intelligence and cloud services.

The investment will allow Malaysian businesses to leverage AI infrastructure and services, and migrate mission-critical workloads to Oracle cloud infrastructure, the company said in a statement Wednesday.

Write to singaporeeditors@dowjones.com

Expected Major Events for Wednesday

06:00/ROM: Aug PPI

07:00/SPN: Sep Unemployment

08:00/ITA: Aug Unemployment

08:30/UK: Sep Narrow money (Notes & Coin) and reserve balances

09:00/EU: Aug Unemployment

09:00/CYP: Aug Retail trade

10:00/IRL: Sep Monthly Unemployment

15:00/DEN: Sep Foreign Exchange & Liquidity

16:59/POL: Polish interest rate decision

23:01/UK: Aug Zoopla House Price Index

23:01/UK: CBI Financial Services Survey

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

October 02, 2024 00:15 ET (04:15 GMT)

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