Traders are bracing for another week of wild swings in oil prices as the ongoing conflict in the Middle East spurs demand for safe-haven assets and causes investors to reconsider their views on global interest rates.
The US dollar, Japanese yen and Swiss franc - all traditional havens in times of turmoil - will be in focus when Sydney markets reopen at 5am on Monday. Risk-sensitive currencies such as the Australian dollar, which saw an early sell-off at the start of last week, could come under pressure again. On Friday, gold posted its biggest gain since March.
The market will also be keeping a close eye on oil prices and U.S. Treasuries, which have seen their biggest swings between gains and losses in years this week. Israel's main stock index, the TA-35, resumed losses on Sunday.
The Israeli military said it was preparing for a "major ground operation" in Gaza. The United States, meanwhile, has held secret talks with Iran in recent days, warning it not to escalate the conflict. After Jordan, Bahrain, Qatar, Saudi Arabia and the United Arab Emirates, US Secretary of State Antony Blinken will make his second stop in Israel on Monday.
A wider war in the Middle East could tip the world economy into recession, according to Bloomberg Economics. Investors' growing concerns about whether the Fed has finished raising interest rates and how the U.S. Congress, without the helm, can avoid a government shutdown have added another concern.
Ed Al-Hussainy, global rates strategist at Columbia Threadneedle, said the deteriorating macro environment, coupled with sharp moves in interest rates, had "set the stage" for increased global volatility. Global investors are keeping a close eye on whether the war between Israel and Hamas will spread to other parts of the Middle East, but for now currency traders are still more focused on the Fed, he said.
While broader measures of market volatility remain subdued, the Swiss franc has surged to its highest level against the euro in more than a year, while the dollar has also advanced for a fourth week. Volatility in S&P 500 stocks has also risen.
There are a lot of uncertainties in the U.S. that could spur further market volatility. Last week, a hot inflation report boosted bets on another Fed rate hike, displacing safe-haven funds in the hours that followed and sparking the biggest one-day sell-off in 30-year bonds since the outbreak.
The expected price movements of the world's largest Treasury bond ETF have outpaced those of the largest equity funds this month, the widest gap since at least 2005, when Bloomberg began compiling the data.
In addition, the U.S. House of Representatives remains leaderless. Republicans nominated Jim Jordan, who has the backing of former President Donald Trump but faces a stiff challenge to win the speaker's job as more moderate members of the party worry about his hardline positions.
But conflict in the Middle East remains the biggest uncertainty for investors to digest.
Jane Foley, head of foreign exchange strategy at Rabobank, said: "We're all on our toes to see which way this is going to go, but until we get really worried about oil supply, the market is going to be holding its breath."
