Asian markets experienced a decline, while oil prices continued to rise on Friday. This drop in markets was primarily due to concerns that Israel’s anticipated ground invasion of Gaza could lead to a broader conflict in the Middle East. These worries were compounded by remarks from Federal Reserve Chairman Jerome Powell, who indicated a potential pause in interest rates at the next Fed meeting but did not rule out the possibility of future rate hikes.
The ongoing Israel-Hamas tensions, which intensified after Hamas militants killed at least 1,400 people in Israel on October 7, have been a cause for concern. In Gaza, over 3,700 Palestinians, predominantly civilians, have lost their lives in relentless bombardments, with rising tensions following an explosion at a hospital, where both sides have blamed each other.
There is growing apprehension that the conflict could spread throughout the region, particularly if Israel launches a ground offensive. Iran’s warning that it could become involved in the conflict has further fueled these fears.
In a sign of escalating regional involvement, the Pentagon reported that a US Navy ship in the Red Sea had intercepted missiles and drones fired by Iran-backed Houthi rebels in Yemen, potentially aimed at Israel.
These concerns about a potential Middle East war have led to a surge in oil prices, with both oil contracts increasing nearly one percent in Asian trade. The heightened “risk premium” in the crude oil market is likely to persist as long as tensions between Israel and Hamas remain high, according to Vandana Hari of Vanda Insights.
In addition to these geopolitical concerns, traders are grappling with the prospect of sustained higher US interest rates as the Federal Reserve seeks to address inflation. Jerome Powell suggested that a rate hike is unlikely at the upcoming meeting in October but left the door open for future tightening, emphasizing that the Federal Reserve will closely monitor data on inflation and the labor market.
Powell’s comments, as well as better-than-expected jobless claims data, which implied a tighter labor market, have affected trader confidence. The yield on the 10-year US Treasury note, considered an indicator of US interest rates, reached levels not seen since 2007. As a result, US and Asian markets both experienced declines, with major indexes in the red.