Israel conflict could stoke greater volatility, inflationary pressures for crude oil, stock markets

THE Israel-Hamas conflict could roil stock markets around the world, with market watchers warning of greater volatility and more inflationary pressures. 

Observers polled by The Business Times urged investors to pay close attention to crude oil prices in tandem with heightened geopolitical risks, even though the overall impact on oil prices is expected to be fairly limited. 

Oil prices spiked on Monday (Oct 9), following news of a surprise attack on Israel by Palestinian militant group Hamas. 

Crude benchmarks surged in early trade, with the West Texas Intermediate (WTI) touching a high of US$87.21, and the Brent coming close to US$89 per barrel. The duo have since pared some of the gains to settle lower. As at Singapore market’s close on Monday, the WTI and Brent benchmarks were up 3.4 per cent and 2.9 per cent respectively.

Vishnu Varathan, head of economics and strategy for Asia at Mizuho Bank, said the latest development in Israel “poses significant uncertainty to energy markets”.

However, he said the current price jumps in the oil market are unlikely to persist in the longer term, unless significant disruptions to the commodity’s supply arise.

For now, he noted that markets have been “desensitised” by the Ukraine war and are “unlikely to panic unless (a) threat of supply disruption is identifiable and imminent”.  

“Any military spillover that results in actual disruption of supplies – or worse, conflict in the Straits of Hormuz – carries the highest risk of a sharp spike in oil,” he said. 

He added that assertions of Iran’s culpability might also amplify upside risks in oil, and sanctions by the US could also pull back Iran’s output and tighten supply further. 

Oanda analyst Kelvin Wong said a clearance with a daily close above US$89.90 for WTI crude oil futures is likely to trigger a “broad-based risk-off scenario” as the inflationary expectations will start to pick up. 

Outside of crude oil, stock markets are also likely to be more volatile. Market watchers said that in the short-term, there are unlikely to be safe-haven stocks or sectors that investors can bet on. 

Higher inflationary expectations in the US are also likely to reinforce the current “higher interest rates for a longer period” stance of the Federal Reserve. This is, in turn, likely to push up the longer-term US Treasury yields, Wong said. 

Listed stocks could face higher long-term cost of funding, and increased odds of lower earnings growth, he said. The opportunity costs of holding long-duration risk assets or growth-related equities via the equity risk premium factor would also track higher, he added. 

He said markets in Asia that are more heavily reliant on oil imports – namely the Philippines and India – could bear the brunt of underperformance.  

As far as South-east Asia equities are concerned, safe havens could be tough to find if the US dollar rises on the back of the uptick in longer-term US treasury yields, he said. 

Saxo market strategist Charu Chanana said the energy sector is likely to take the most direct hit. Energy importers, including Asia as a region and Singapore, are likely to be left “exposed”. 

A rise in the US dollar could also “complicate the policy outlook for Asia”, even though the Fed is unlikely to raise interest rates further in the current volatile environment, she added. 

Thilan Wickramasinghe, head of regional financials at Maybank Investment Banking Group, said the bank sees oil prices “firming higher” and safe-haven flows to the US dollar rising.

“These could stoke inflationary pressures for Singapore,” he noted. In terms of impact, he said sectors such as transportation and utilities could face immediate increases to operating costs from higher energy costs. 

Agriculture stocks, as well as sectors dependent on commodity inputs, such as food and beverage, could also feel knock-on effects due to higher fertiliser costs and increases in other raw material expenses, he said. 

Banks are also likely to take a hit from an asset quality perspective on the back of tighter operating margins and higher interest costs. 

“We think this may add further momentum to companies and countries building energy independence and diversifying risks,” said Wickramasinghe, adding that this could be supportive for the offshore and marine and oil and gas sectors, as well as companies developing alternative-energy strategies. 

Mizuho’s Varathan said he is expecting softer equity sentiments that are generally associated with cost shocks, as well as a blanket “profit squeeze”. 

He reckons energy and defence-related stocks could do well, partly compensating for the broader sell-off, while defensive and lower-yielding stocks could also outperform growth stocks. 

Asian markets were a mixed bag at Monday’s close. The Straits Times Index and SSE Composite Index were down; key indices such as the Bursa and Hang Seng Index were in the black.