Markets may ignore West Asia events till there's no invasion: Chris Wood

Markets will continue to try to ignore events in West Asia so long as no invasion is launched, wrote Christopher Wood, global head of equity strategy at Jefferies in his latest weekly note to investors, GREED & fear.

This, he believes, can even trigger a relief trade in the markets, allowing them to ignore the native implications of uncomfortably high bond yields for a while.

“If GREED & fear is wrong and the invasion is launched, there will be an immediate negative impact in terms of a spike in the oil price and renewed concerns of a broader regional conflict, concerns which unfortunately will be quite legitimate,” said Wood, who is also one of the speakers at the two-day Business Standard BFSI Insight Summit starting October 30 in Mumbai. MORE DETAILS HERE


Meanwhile, Israel launched ground raid into northern Gaza on Thursday, reports suggest. Wood believes that Israel is biding its time, waiting for the news cycle to play out, while working out the best plan of attack. 

“This is entirely possible. Still it is not so clear to GREED & fear that time is on the side of the present Israeli government given the need of its leadership to preserve the sense of crisis before the underlying internal political divisions within Israel resurface again,” he said.

Over the past few weeks, equity markets have reacted sharply to the developments in West Asia with most frontline indices across the globe slipping 1 per cent to 7 per cent. 

Indian markets are among the worst hit in Asia, with the S&P BSE Sensex slipping over 5 per cent to trade below the 64,000 mark. On the other hand, the Nifty50 has also lost close to 5 per cent and has dipped below the 19,000 mark for the first time in four months.

Oil on the boil

Another casualty of the Israel – Hamas war have been crude oil prices, which jumped to over $92 a barrel (Brent) by October 18 from $84 a barrel on October 5, translating into a rise of nearly 10 per cent in barely 13 days. Prices, however, have come off a tad since then.

When it comes to the market reaction from here, analysts at UBS believe oil remains the main transmission mechanism for a risk-off trade, and a significant move higher is the key event to watch.

As things stand, they do not expect oil prices to spiral out of control and see Brent crude oil fluctuating between $90 a barrel and $100 a barrel, alongside any local escalations such as involvement from Hezbollah. 

While pressure toward the $105–110 a barrel range is possible with an incremental reduction in Iranian exports, UBS said there is currently spare capacity sitting with OPEC+ to help offset the impact. A more pronounced move above $120 a barrel, they said, is likely to only come with a significant supply disruption. 

“There are a few ways this could feasibly play out: through a larger removal of Iranian oil from the market; a closure of the Strait of Hormuz, which accounts for over 20 per cent of the world’s daily flow; or by some form of coordinated embargo among Arab countries. But while none of these outcomes can be ruled out, they are currently tail risks, in our view,” analysts at UBS wrote in a recent report.