On October 1, 2024, missiles launched from Iran were observed in the sky over Tel Aviv, Israel. The ongoing regional conflict in the Middle East, combined with rising unemployment in the United States, presents significant risks for market stability, according to Stephen Roach, a senior fellow at Yale Law School’s Paul Tsai China Center.
The conflict escalated when Iran initiated a ballistic missile attack on Israel following the killing of Hezbollah leader Hassan Nasrallah and an Iranian commander in Lebanon. This escalation comes in response to previous Israeli actions.
Asian markets experienced a decline on Wednesday, mirroring overnight losses on Wall Street as investors grew increasingly concerned about the heightened tensions in the Middle East. Roach noted that these conflicts are exacerbating inflationary risks at a time when global central banks are beginning to ease monetary policy. He foresees significant market volatility as a result.
The Israel Defense Forces (IDF) reported new strikes against Hezbollah targets in Lebanon as a response to Iran’s missile attack. Stephen Stanley, the chief economist at Santander, indicated that the potential longer-term effects on inflation are uncertain. However, he suggested that the oil market could be significantly impacted if tensions continue to rise.
Iran, as the third-largest oil producer among the Organization of the Petroleum Exporting Countries (OPEC), produces nearly four million barrels of oil per day. Following the missile strike, oil prices surged by over 5% before reducing to a 2% increase.
Kelvin Tay, regional chief investment officer at UBS Global Wealth Management, mentioned that the duration of the markets’ adverse response would depend on several factors, including Israel’s reaction to the attacks. He suggested that a measured response could prevent further escalation and help stabilize the situation.
Roach emphasized that increased tensions in the Middle East could lead to higher oil prices and inflation, which would potentially compel central banks to reconsider their monetary policies. The U.S. Federal Reserve had indicated plans to reduce interest rates by another half point over the next two policy meetings, based on their projections from the September meeting.
Traders are also closely monitoring upcoming U.S. payroll data for insights into the economic outlook following the Federal Reserve’s recent rate cut. The unemployment rate for September is expected to remain at 4.2%, the same as in August. The rate had surged to 4.3% in July from a 50-year low of 3.4% in April 2023.
Additional market volatility may arise from the duration of ongoing dockworkers’ strikes on the U.S. East and Gulf coasts, which span from Maine to Texas. These strikes, involving disputes over wages and automation, are expected to disrupt global supply chains significantly, potentially halting nearly half of the country’s ocean shipping.
Peter Tirschwell of S&P Global Market Intelligence warned that any disruption at the ports could quickly lead to substantial economic consequences, with increasing damage the longer the strikes persist.
This article includes a correction to a quote from Kelvin Tay, regional chief investment officer at UBS Global Wealth Management.
