Middle East tensions loom large over sharemarket

The ASX is poised for a cautious start to the week as traders fret about the prospect of a broad Middle East conflict.

The threat of a broad conflict in the Middle East is set to loom large over Australian shares, though further global monetary policy easing will provide some support, market experts say.

Israel intensified its attacks on Beirut at the weekend but it has yet to show its hand over how it intends to respond to Iran’s 180-rocket attack, a response that has stoked fears of escalating conflict in the region.

Shane Oliver, head of investment strategy and chief economist at AMP, said the prospect of the conflict intensifying was weighing on market sentiment. “Right now, investors are on edge waiting to see what happens next in the Israel-Iran conflict,” he said.

ASX futures point to a 0.1 per cent rise in the market on Monday.

Oil prices have spiked in recent days, jumping by nearly 10 per cent from their lows a week ago, though the rally has taken prices back to where they were in August.

Stronger oil prices are beginning to flow through to petrol bowsers, which will add pressure to Australia’s battle with inflation.

Inflation has fallen below 3 per cent, though the Reserve Bank has indicated it would not begin cutting interest rates until it believed rises were sustained within its 2-3 per cent target band.

While the RBA has indicated it expected the first of these cuts to be some months away, the US Federal Reserve has already moved with a 0.5 per cent cut, with more reductions seen as likely before year-end.

Data released late last week indicates the US is likely to move less aggressively and 25-basis-point reductions are now more likely.

Data showed the US economy added 254,000 jobs last month, blowing past economists’ estimates. The figure has raised optimism on Wall Street that the economy will achieve a soft landing, or a scenario in which inflation comes down and there’s no recession.

Traders now ascribe a near certainty of a 25-basis-point cut in November, which would bolster Australian shares.

The European Central Bank and the Bank of England are also set to cut interest rates this month, and the UK could move aggressively, the head of the central bank has indicated.

The moves will fuel global equity rallies, which traders insist means Australia will eventually have to follow the lead of its counterparts.