Oil prices surged on Friday as the United States and the United Kingdom launched strikes on Houthi military targets in Yemen, sparking a safe-haven push among investors. Global shares also edged up, while government bond yields fell, indicating the demand for safe-haven assets. The conflict in the Red Sea region escalated following the Houthi group’s attacks on ships, resulting in a dramatic expansion of the Israel-Hamas war in Gaza. Brent futures rose 2.45 percent to $79.25 a barrel, and U.S. West Texas Intermediate (WTI) crude climbed 2.6 percent to $73.86.
The rise in oil prices was met with caution by investors. While the conflict in the Red Sea region contributed to the surge, it also raised concerns about the impact on global growth. However, there was optimism that the situation would not significantly affect inflation. Chris Scicluna, Head of Economic Research at Daiwa Capital Markets, stated, This morning, the oil price has responded in a relatively measured way…there is a slight flight to quality, but not something that is a game-changer.
Meanwhile, the dollar and gold both saw gains as investors sought safe-haven assets amidst the escalating conflict. The dollar strengthened against major currencies, and gold rose 0.5 percent to $2,040 an ounce. Analysts also suggested that if the situation were to intensify further, traditional safe-haven assets such as U.S. Treasuries, the yen, and the Swiss franc could see increased demand.
In Asian markets, Japan’s Nikkei continued its upward trend, reaching another 34-year high with a 1.5 percent jump. Chinese inflation data indicated a weak economic recovery in December, with the consumer price index falling 0.3 percent compared to the previous year. However, trade data showed a faster-than-expected increase in exports, and imports returned to growth.
In the United States, consumer prices rose more than anticipated in December, with certain sectors experiencing increased pressure, including energy and the cost of used cars. Despite this, economists do not foresee a sharp fall in inflation or a significant decline in the economy that would prompt aggressive rate cuts from the Federal Reserve.
Current figures suggest a 73-percent probability of a rate cut by March, and traders are pricing in approximately 150 basis points of easing throughout the year. Treasury bonds remained steady following a rally in shorter-dated bonds. The two-year yield remained unchanged at 4.26 percent, while the 10-year yield held steady at 3.97 percent. Euro zone government bonds also saw an influx of funds, resulting in a 6 basis point drop in the yield on the benchmark 10-year German Bund to 2.146 percent.
European Central Bank (ECB) President Christine Lagarde hinted at the possibility of rate cuts if there was certainty that inflation had fallen to the bank’s 2 percent target. Her comments provided additional support to the European bond market.
As the conflict in the Red Sea region intensifies, investors are closely monitoring its impact on oil prices and global growth. The situation also highlights the importance of safe-haven assets and the potential for market fluctuations. With ongoing uncertainties, markets will likely continue to react and adjust accordingly.
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