Stocks sank ahead of the bell on Monday as the Middle East conflict added a dose of geopolitical risk to the interest-rate and inflation concerns already facing markets.
Dow Jones Industrial Average (^DJI) futures dropped roughly 0.4% or about 130 points. S&P 500 (^GSPC) futures lost about 0.5%, while contracts on the tech-heavy Nasdaq 100 (^NDX) fell almost 0.7%.
Islamist militant group Hamas launched a large-scale attack on Israel on Saturday, prompting a declaration of war in response. That has rattled markets, as investors worry that another full-blown conflict could join the war already being waged by Russia and Ukraine.
“Geopolitical risk doesn’t tend to linger long in markets, but there are many second order impacts that could come through in the weeks, months and years ahead from this weekends’ developments,” Deutsche Bank strategist Jim Reid said.
Oil prices jumped as much as 5% after the attack, amid speculation that key crude-producing countries in the region could be pulled into the fray. WTI crude oil futures (CL=F) and Brent crude futures (BZ=F) were trading about 3% higher at last check as fighting enters its third day. Meanwhile, safe-havens gold (GC=F) and government bonds were in demand.
A sustained rally in oil could add to the inflationary pressures that already have investors bracing for another interest-rate hike by the Federal Reserve.
Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards
Investors are increasingly facing up to the reality that borrowing costs are likely to stay higher for longer, with the surprisingly hot September jobs report on Friday just the latest data to make the case for more restrictive policy.
The recent rise in bond yields to 16-year highs shook investors who were already worried about the impact on the economy of further rate hikes, and put pressure on stocks. But it could give the Fed a reason to pause hiking, given some of its officials believe the bond rout is likely to tighten credit considerably. Trading in US Treasuries is closed for the Columbus Day holiday on…
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