Oil slumps after Israel’s attack; yen slips on Japan election shock

Israel strikes back at Iran, but relief on measured attack

Oil prices tumbled as trading got underway on Monday, opening with a gap down as investors responded to Israel’s retaliatory attack against Iran on Saturday. Whilst this is yet another escalation in the one-year-old-conflict in the region, Israel’s measured response to Iran’s October 1 attack, whereby it targeted only military facilities, brought widespread relief to financial markets.

This is unlikely to be the end of the retaliatory strikes between the two archenemies, with Iran weighing its options on how to respond. But Israel’s calculated attacks on strictly military targets that did not include oil and nuclear sites has raised hope that the two sides will continue to show restraint.

For oil, however, this is hugely negative in the short term, with futures slumping by around 6.0%. Gold has also taken a hit, falling by around 0.60%, as an all-out conflict appears to have been averted for now.

Yen drops as Ishiba’s gamble doesn’t pay off

The safe-haven Japanese yen was not immune to the selloff, although domestic politics was the biggest trigger for the currency’s broad slide. The snap election called by newly appointed Japanese Prime Minister Shigeru Ishiba has backfired as the ruling Liberal Democratic Party (LDP) and its coalition partner Komeito lost their parliamentary majority in Sunday’s general election.

Ishiba has vowed to remain in office, ignoring calls to step down, but has signalled he has no plans to seek new junior partners to expand the coalition. This potentially marks the start of a new era of political instability in Japan, unnerving investors a week before the US presidential election where Donald Trump is neck and neck in the opinion polls with Kamala Harris.

The US dollar hit a three-month high of 153.87 yen earlier in Monday’s session as the prospect of political uncertainty in the world’s largest and fourth largest economies weighed more heavily on the Japanese currency. The Bank of Japan is unlikely to tweak its monetary policy settings when it meets on Thursday, preferring to wait for the political dust to settle.

Jam-packed week for data and earnings

With just over a week to go to US Election Day, Trump’s momentum in the polls shows no sign of stopping as the Democrats go into panic amid a dip in Harris’s fortunes with voters. However, despite the risk associated with a second Trump presidency, US yields, and in turn the dollar, are rising on the expectation that his policies will be inflationary.

But ahead of the election, several tests await. The US Treasury department will announce details of its next quarterly refunding on Wednesday, which may push yields even higher if there are plans to increase the size of new debt issuance. The first estimate of Q3 GDP growth will also be important on Wednesday before attention turns to Thursday’s PCE inflation figures. The week will culminate on Friday with the all-important jobs report.

It will be a significant week for the euro as well, as flash GDP and CPI numbers are due for the Eurozone. The euro is steady today just above the $1.08 mark, but it could come under renewed pressure if the data bolsters rate cut hopes for the ECB and dents them for the Fed.

It will be a big week for equities too, as Big Tech earnings will heat up. Alphabet, Microsoft, Meta Platforms, Apple and Amazon are all scheduled to report in the coming days.