Israel-Hamas war: The unexpected escalation of the decades-long conflict between Israel and the Palestinian militant group Hamas on Saturday has significantly heightened the geopolitical risks for the markets.
Experts quoted by Economic Times say that the extent of the fallout in the days ahead will depend on the involvement of countries such as the US and Iran in the conflict, and the direction of oil prices.
Some believe that the surge in oil prices will be limited unless the US and Iran become parties in the conflict. Iran which is a big supporter of the Hamas group is a major oil producer. If U.S. and other developed countries put fresh sanctions on Iran, it will disrupt the oil supply leading to a price rise.
"Much will depend on whether the crisis turns out to be another short-term flare-up or something much bigger like a war between Israel and Iran,"Ed Yardeni, founder and chief investment strategist at Yardeni Research, a New York-based investment consultancy told Economic Times. "That's unlikely, but today's conflict will only escalate the tensions between these two adversaries. The price of oil may be a good way to assess the likelihood of a broader conflict."
Crude oil prices have already surged over 4% on Monday.
Inflation in the U.S would stick for a longer period if the oil prices go up. This would in turn force the Federal Reserve Bank to increase the interest rate tying the hands of the investors. Elevated interest rates in the US make Indian equities less attractive for investors there.
"If oil prices go up further, US inflationary pressures would remain and cause US bond yields to cross 5%. That will not be taken kindly by the markets", Ritesh Jain, co-founder, Pinetree Macro told Economic Times.
The Indian equity benchmark indices Nifty and Sense fell about 1% each during the early trade on Monday.
"I would be more worried about the mid-cap and small-cap space if the geopolitical situation blows out of control," S Naren CIO, ICICI Prudential Asset Management told Economic Times
Meanwhile, Israel equities plunged 5.8% while Saudi Arabia was down 1.7%, Kuwait and Qatar markets were trading weak.
On October 6, the 10-year US Treasury yields touched an intraday peak of 4.8%, highest seen since August 2007. The 30-year-long bond, too, breached the 5%-mark for the first time since August 2007.
Ritesh Jain, co-founder at Pinetree Macro wrote in LinkedIn a risk-off sentiment was seen across European peripheral bonds.
Italian 10-year yields were above 5% last week for the first time since 2012, whereas Spanish 10-year yields were above 4% for the first time since 2013. Separately, Japanese 10-year yields jumped above 80 bps last week, a feat seen for the last time in a decade.
On October 9, the safe-haven dollar advanced 0.2% versus euro and pound, while risk currencies such as Aussie and kiwi weakened. The war could further lead to dollars upsurge.