• Escalating tension in ME is a concern

• Obvious signs of investors seek a refuge on safe investment (gold, USD).

7th October will etch as one of the most unexpected surprises for the global equity market. That was the day when Hamas launched an attack on Israel. Two weeks has passed and the geopolitical tension in the Middle East (ME) is showing no sign of slowing down, let alone a truce. Based on the news flow and equity market indicator, it is predicted that the conflict in ME may get worsened in the next few weeks, if there is no international intervention. True, Palestine and Israel have been at war or conflict since more than 50 years but by far, this is the most serious amid the clear involvement of superpower backing the transgressor (Hamas, Israel). The spark and consequently worsening situation in ME have caused a clear shift of trading strategy from ‘risker asset’ to ‘safe investment’. On that score, gold, USD and Yen emerged triumphant. VIX index also surged noticeably amid investors’ fear of a full-blown war. Stocks fell around the world with a sea of red in North America and Europe last Friday. Asia Pacific fared sightly better with JCI and Ho Chi Minh stocks escaped the wrath. Having said that, gold spiked to USD1,981 per ounce troy (+2.5% w-o-w) last Friday. Dollar Index remained elevated after ending the week at 106.163, 0.8% higher compared to a month ago. Ringgit also hurt amid the currency that slipped to a low RM4.7695 per Dollar during the week, a multiyear low. If the conflict in ME worsens, Ringgit could be testing a historical low of USD4.88 per Dollar (1997). VIX index, a fear indicator, also jumped or to 21.71 compared to 15.14 a month ago, the highest for the month. Oil, using Brent crude as a benchmark, climbed again after reaching USD92.16 per barrel, a concern for our fiscal position amid a rise oil price and weakening in Ringgit that could cost higher subsidy expenditure for the government.

At this stage, all signs are pointing towards a full-blown tension in ME. Superpowers like China and US could use this apparatus to work together to avoid a catastrophe but both appear at odd, adding another layer of geopolitical competition to an already complex situation. Jittery investors sentiment may be further ‘rattled’ by the US FOMC policy meeting, scheduled on 31st October/1st November. Though consensus expect a policy status quo in November policy meeting but US’s September inflation that remained unchanged at 3.7% is a cause for concern that may push US FOMC to remain hawkish, or worst, continue with its fight to bring down inflation by tightening the FFR further. This is consistent with its many policy statements and guidance before. A bloated US JOLTS that reached 9.7mn in September (+9% MoM) is another worry. This is close to 1-fold higher than the pre-COVID years, highlighting the challenge to bring down inflation in US. In sum, we expect investors sentiment to remain cautious in the near term and hence, downside risks to the market.

Source: BIMB Securities Research - 23 Oct 2023