Gaza strikes endanger fragile calm in markets
A tentative rebound in global stocks is in danger as Israel’s renewed attack on Hamas threatens the recent fragile calm in geopolitical flashpoints.
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Nervous traders were already looking for an excuse to hit the sell button after a two-day rebound in stocks. They may have it as the shaky ceasefire in the Gaza Strip came to an abrupt end.
After Israel conducted extensive military strikes on Hamas targets on Tuesday, the fragile calm in one of the world’s major geopolitical flashpoints was shattered, and along with it, the hope of a US-brokered peace deal in the Middle East.
It came after US airstrikes on Houthi rebels based in Yemen over the weekend and a vow from US President Donald Trump to hold Iran accountable for any further attacks on shipping by the rebels.
On Monday, Morgan Stanley’s chief investment officer, Mike Wilson, said a “tradeable rally” in US stocks was likely after the S&P 500 fell as much as 10 per cent in recent weeks.
“Negative earnings revisions breadth, fiscal headwinds, immigration enforcement, and tariffs took the index to the low end of our 1H range of 5500-6100 last Thursday,” Mr Wilson said.
“But indices were as oversold as they’ve been since 2022, sentiment and positioning gauges have lightened up considerably, and seasonals improve in the second half of March.
Recent dollar weakness could provide a tailwind to earnings revisions, and the decline in rates should benefit economic surprise indices.”
However, Mr Wilson conceded that “growth concerns and volatility are likely to persist” as “policy uncertainty has ramped up further in recent weeks. Indeed, investors are still grappling with US recession risk stemming from a global trade war that looks set to get worse before it gets better.
“Policy uncertainty has only ramped up further recently, which means growth risks are likely to persist over the coming months,” he said.
“Perhaps even more importantly, this administration doesn’t appear to be preoccupied with stock prices.
“In other words, we don’t think investors should view a relief rally from oversold levels as a sign that volatility is subsiding in a durable manner.”
Mr Wilson said US policy is being “sequenced in a more growth-negative way” and the “speed and uncertainty of policy implementation is denting investor, consumer and corporate confidence.”
“The flip side is that the Fed does have firepower and will use it if growth and jobs data deteriorate materially, or we see stress in credit and funding markets, both of which are stable, for now.”
The Federal Reserve Open Market Committee will get a chance to build on the nascent calm in markets in recent days this week when its two-day meeting concludes early Thursday.
While the initial reaction to the end of the Gaza ceasefire was modest, there was a clear move to safe havens and crude oil in favour of stocks. Australia’s S&P/ASX 200 erased a 0.9 per cent rise. S&P 500 futures fell 0.3 per cent.
Brent crude oil futures rose 0.4 per cent to $US71.35 a barrel. Spot gold rose 0.5 per cent to a record $US3.015.14 per ounce. Ten-year US Treasury yields fell 1.5 basis points to 4.28 per cent.
The risk of a wider military confrontation in the Middle East was already rising after the most significant US military strikes on Houthi targets in over a year and President Trump’s subsequent warning that Iran will be held responsible and face “dire” consequences for any Houthi response.
The Houthis, one of the first armed actors to enter the war on the side of Hamas, had initially halted their Red Sea maritime attacks following President Trump’s inauguration and efforts to secure a ceasefire. But the group resumed their Red Sea strikes following Israel’s multi-week blockade of Gaza, and representatives vowed that attacks would continue until the blockade is lifted.
While such actions have caused an increase in shipping times and insurance costs, to date they have not led to significant oil supply disruptions, according to RBC Capital Markets.
However, in a deepening confrontation between the US and the Houthis, one clear risk is that the militant group once again targets critical infrastructure in neighbouring states to internationalise the cost of the war, said RBC’s head of global commodity strategy, Helima Croft.
“We continue to highlight the risk of a return to the 2019 playbook, when Iran’s Islamic Revolutionary Guard Corps and the Houthis targeted a wide range of energy assets and infrastructure in the Gulf, including tankers off the coast of Fujairah, as well as Saudi Arabia’s East-West Pipeline and Abqaiq processing facility,” said Ms Croft, a former energy market analyst at the CIA.
Ms Croft said that by targeting the Houthis and issuing his subsequent warning, President Trump was likely also “signalling to Iran the high cost of not accepting his offer to restart nuclear talks.”
Last week, the Iranian Supreme Leader initially rejected a diplomatic overture from the White House that was delivered by a senior UAE diplomat. And with Iran continuing to accelerate its nuclear activity, it is unclear what type of concessions would be acceptable to the various interested parties.
Over the weekend, US national security adviser Mike Waltz seemingly signalled that the White House is looking for Iran to halt uranium enrichment and hand over its missiles.
“Such terms would go well beyond what Iran agreed in 2015 as part of the JCPOA (joint comprehensive plan of action) nuclear agreement,” Ms Croft said.
“Given the loss of Iran’s most formidable Axis of Resistance proxy Hezbollah — and with it, its means to project power globally — it is far from certain that the leadership would agree to such terms, and in fact it may have already made the decision to pursue a weaponisation strategy.
“The Supreme Leader may decide that going the Pakistan route may provide a better security dividend, given that several countries that voluntarily handed over their nuclear infrastructure were later invaded or subject to regime change operations – most notably Libya in 2011.”
Iran has for some time been seen as able to generate sufficient amounts of fissile material in a matter of days. But reports last month that its engineers and scientists were actively seeking to compress the timeline to make a rudimentary nuclear weapon from a year to a matter of months.
“Moreover, IAEA (international atomic energy agency) reports in recent weeks indicate that Iran dramatically increased its high-level uranium enrichment since October, and that as of February 8, the country has enough near-weapons grade uranium to produce one bomb within a week and seven bombs in three weeks,” Ms Croft said.
“Hence, we stand by our February assessment that Iran could emerge as the source of the biggest geopolitical price delta, depending on if the country strikes a deal with the US, obtains a nuclear weapon, or is subject to military action.”
Originally published as Gaza strikes endanger fragile calm in markets
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