Global investors are closely monitoring the conflict in the Middle East as the risks of involvement of other countries may affect prices. However, investors are more worried about the Federal Reserve's interest rate decisions.
"As long as the war remains relatively localized, U.S. investors are keeping an eye on the Middle East but focused on the Federal Reserve and the earnings season," said Paul Nolte, market strategist for Murphy & Sylvest in Elmhurst, Illinois, as quoted by Reuters.
A strong inflation report last week boosted expectations of a December rate hike, with futures contracts now indicating a 40 percent probability, up from the previous 28 percent. This follows the 3.7 percent year-on-year increase in the consumer price index, a development that triggered the most significant one-day selloff in 30-year bonds since the beginning of the pandemic.
The U.S. government bond market was turbulent last week, experiencing significant fluctuations in response to inflation concerns and lackluster auction results. This month, the expected volatility in the largest Treasury ETF surpasses that of the largest stock fund by the widest margin since at least 2005, based on Bloomberg data.
Asia started this trading week with reduced demand for safe-haven assets after gold prices surged over three percent and the U.S. dollar reached a week-high on Friday.
The U.S. dollar and Treasuries, typically sought during uncertain times, weakened in early trading, while risk-sensitive currencies like the Australian dollar gained ground. The Australian dollar rose 0.19 percent to $0.6309 after slipping 1.4 percent last week. The New Zealand dollar also saw gains at 0.33 percent to $0.5904.
Changes in oil prices
Oil prices were mostly flat on Monday in Asia after dipping slightly and partially reversing Friday's surge.
Brent futures dipped 0.4 percent to $90.55 per barrel, and U.S. West Texas Intermediate (WTI) crude declined 0.5 percent to $87.28 a barrel in early trading. A few hours later, Brent futures gained slightly to $90.89 per barrel and WTI to $87.67.
Both benchmarks had posted their most significant daily gains since April at nearly six percent on Friday. Brent saw an increase of 7.5 percent weekly, while WTI rose by 5.9 percent.
While the conflict in the Middle East has not yet significantly affected global oil and gas supplies, Reuters maintains that the war presents a substantial geopolitical risk to oil markets. The situation is similar to Russia's invasion of Ukraine last year. Market players are evaluating the potential impact of a broader conflict on oil supplies from top-producing countries like Saudi Arabia, Iran and the United Arab Emirates.
"The impact that may involve oil-producing countries has been factored into the prices to some extent, but if an actual ground invasion were to occur and have an impact on oil supply, the prices could easily exceed $100 a barrel," said Hiroyuki Kikukawa, president of NS Trading, a unit of Nissan Securities.
Recent developments show a significant sign of crude's near-term strength, with the gap between the two closest Brent crude oil contracts now standing at $1.59 per barrel in backwardation. This gap has widened from 89 cents just a month ago.
This trend is due to the ongoing output cuts by key players in the OPEC+ alliance, particularly Saudi Arabia and Russia, which are effectively tightening the oil market.