Investing.com - The possibility of a full-blown conflict in the Middle East is stoking fears among investors, pushing up oil prices and casting a shadow on the global inflation outlook. This development also threatens to quash investors' expectations for a reprieve in interest rates this year.
The S&P/ASX 200 opened 0.2% lower on Monday, extending losses of 1.6% last week. This downward trend is driven by escalating geopolitical tensions and surging bond yields, moving record highs for global equity benchmarks further out of reach.
The crisis escalated when Iran launched more than 200 drones and missiles at Israel on Sunday, marking Iran's first direct attack on Israeli territory. This occurred during the closing of futures markets trading, and the Australian dollar has since slipped below US65¢.
Despite the US expressing unequivocal support for Israel, President Joe Biden has indicated that his administration would oppose any retaliatory attack by Israel on Iran.
On Friday, oil prices surpassed $92 per barrel for the first time since October, marking a 17% increase this year.
Amid these uncertainties, spot gold prices reached a new all-time high at $US2431.29 per ounce, all three US equity indices fell by over 1% on Friday, and the US dollar reached a five-month high against a basket of major currencies. Bitcoin and Ether, the world's leading cryptocurrencies, also experienced significant drops over the weekend.
The Australian dollar fell by 1.1%, settling below US65¢, as US interest rates continue to be more alluring to bond investors. Furthermore, last week's unexpected inflation surge in the US suggests this trend will persist.
The escalating Middle East conflict is expected to negatively impact investor sentiment by directly influencing costs for air transportation and shipping. However, energy and gold producers could stand to benefit. The situation also poses challenges for the Reserve Bank of Australia (RBA), as a lower Australian dollar would be inflationary.
In light of these developments, futures traders have significantly reduced their bets on a US central bank interest rate cut as early as June. Consequently, the likelihood of any rate relief by the RBA this year has been largely dismissed.
Ahead in the week, local traders will be looking towards fresh jobs data for March, due for release on Thursday.