‘Geopolitics is notoriously difficult to predict even with the collective wisdom of the markets so I wouldn’t expect markets to price that in ahead of time,’ said Michael Reynolds, vice president of investment strategy at Glenmede.
Intensifying conflict in the Middle East, stemming from Israel’s war on Hamas, is giving rise to concerns by traders and investors about the possibility of a second wave in U.S. inflation that hasn’t been fully factored into the financial market.
“It’s hard to imagine a scenario where it’s deflationary, that’s for sure. The question is just how inflationary it is,” said Michael Reynolds, vice president of investment strategy at Glenmede, which oversees $42 billion in assets from Philadelphia. “If we maintain the status quo now of limited conflict, it may not be materially inflationary.
But inflation, as measured by the year-on-year change in the U.S. consumer price index, kept moving mostly higher for more than a year after the 1973 war, an event that led to the 1973-1974 oil embargo. The embargo banned petroleum exports to targeted nations, including the U.S., and introduced cuts in oil production.
Markets also pulled back a bit from recent moves which had been fueled by U.S. economic resilience and persistent inflation. Those earlier moves had involved traders boosting the likelihood of a December interest rate hike by the Federal Reserve, pushing the dollar to its highest levels in 20 years, and sending long-term Treasury yields into multiyear highs.
“Certainly there are concerns about upside risks to oil prices,” he said. “If things really do escalate rapidly and other countries are brought in, it’s fair to say that $140/barrel oil may be well within sight. We’re not ruling that out, but we don’t have quite enough information. Ultimately, there’s a whole range of outcomes we could have and we would be more concerned about how oil price shocks may feed into inflation expectations.
A long line of Fed policy makers are set to speak during the coming week, ahead of the media blackout period which leads up to the central bank’s Oct. 31-Nov. 1 meeting.
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