Escalating Middle East conflict sparks investor anxiety in currency and commodity markets

A plume of smoke billows behind high rise buildings in the sky during an Israeli airstrike on Gaza City yesterday. Photo: AFP

A plume of smoke billows behind high rise buildings in the sky during an Israeli airstrike on Gaza City yesterday. Photo: AFP

Published Oct 10, 2023


Investor sentiment in the currency and commodity trading turned sour yesterday as risk aversion in global markets heightened due to the escalating violence in the Middle East.

Palestinian militant group Hamas launched the biggest attack on Israel in decades on Saturday, killing several hundreds and taking others hostage.

In a swift response to what some have called Israel’s 9/11, Israeli fighter jets bombarded parts of the Gaza Strip, which also resulted in major casualties.

The developments in the Middle East saw global oil prices shooting up as the markets worried that the conflict could disrupt already tight oil flows following Saudi Arabia and Russia’s production cuts.

Brent crude oil prices rose by 4% to around $88 (R1707) per barrel yesterday after prices softened from mid-$90 toward the end of the week.

While the violence is contained in the region for now, analysts feared that geopolitical tensions could escalate globally amid reports that Iran was involved in planning the attacks.

This comes as the international oil benchmark plunged more than 8% last week as signs of weakening demand outweighed tightening supply.

In a note yesterday, the Bureau for Economic Research (BER) indicated that oil prices could take a turn for the worse in the Middle East conflict.

“Unfortunately, last week’s sharp oil price decline may be short lived,” BER said.

“The renewed and severe escalation in the long-running feud between Israel and Hamas has the potential to turn into a regional Middle East conflict that potentially involves major oil producers like Saudi Arabia and Iran.”

Gold prices also jumped 1% to around $1 850 an ounce yesterday, extending gains from the previous session as the Israel-Hamas conflict extended into a third day, raising geopolitical risks in the Middle East.

On Friday, the metal gained 0.7% amid a pullback in the dollar, even as a stronger-than-expected US jobs report fanned rate concerns.

Higher interest rates raise the opportunity cost of holding non-yielding bullion and make gold less attractive to investors, and vice versa.

Rand weakens

By 5pm the rand was 9 cents weaker at R19.41 against the bullish dollar. The US dollar also continued dominance mainly due to the convenience of having a single currency that is accepted across the world.

The greenback had lost nearly 1% against a basket of peers over the past three sessions as traders scaled back bets of further monetary tightening from the Federal Reserve.

TreasuryONE currency strategist Andre Cilliers said that the Middle East conflict had spurred a risk-off scenario, with gold trading higher as investors looked for safe-haven assets in light of the Israeli/Palestinian military conflict.

Cilliers said the Palestinian/Israeli crisis over the weekend had seen the US dollar firming on the back of a flight to safety in markets.

“The rand, which had staged a strong pullback on Friday, was trading softer in line with softer emerging markets and risk-sensitive currencies,” Cilliers said.

“Trade in the rand will likely remain cautious as markets wait to see how the Middle East situation develops.”

However, investors remained worried about a wider conflict amid allegations of Iranian involvement in the attacks.

Investec chief economist Annabel Bishop said the risk-off sentiment had risen in global financial markets as geopolitical tensions escalated.

Bishop said the 336 000 new jobs added to the US economy in September, equating to the largest rise since the start of the year, had raised concerns about the pace of the slowdown in inflation in the face of the more robust expenditure from increased hiring, and so delayed the likelihood of US interest rate cuts, supporting risk-off.

“Also adding to risk aversion for global financial markets is the uncertainty of the outbreak of war in the Middle East between Israel and Palestine, which is seen to risk some upwards pressure on oil prices and so potentially inflation,” Bishop said.

“Worries also stem from the conflict broadening to include other countries in the Middle East, as well as the conflict deepening. Israeli Prime Minister, Benjamin Netanyahu, has already warned that it will be a “long and difficult war.”