The potential for crude oil to challenge previous highs of $120 is a key question. International markets experienced significant volatility this week, with persistent Middle East tensions driving oil back above $100, intensifying concerns about the economic outlook.
In market performance, US stocks declined across the board. The Dow Jones Industrial Average fell 0.90% for the week, the Nasdaq Composite dropped 3.23%, and the S&P 500 index declined 2.12%. European markets were mixed; the UK's FTSE 100 index gained 0.49%, while Germany's DAX index fell 0.36%, and France's CAC 40 index rose 0.47%.
Numerous factors will demand attention next week. The situation in the Middle East remains a core influence as diplomatic efforts continue. US employment data and the Eurozone's March inflation rate will be closely watched, as these figures will begin to reveal the economic impact of the Middle East conflict, particularly the effect of soaring energy prices on various economies. Several European countries will have a shortened trading week due to the Easter holiday, with most markets closed on April 3rd.
**Will March Non-Farm Payrolls Rebound?** The March Non-Farm Payrolls report is highly anticipated as a direct indicator of the US labor market's health. Following an unexpected loss of 92,000 jobs in February, the focus for the March data is not only on a potential rebound but also on whether the previous month's figure will be revised upward. Market consensus expects an addition of 48,000 jobs in March, with the unemployment rate forecast to edge up slightly to 4.5% from 4.4%. HSBC economists noted, "We believe the underlying trend in the US labor market is one of modest but positive growth."
Ahead of this report, investors will monitor the March ADP private payrolls report on April 1st, the February JOLTS job openings data on March 31st, and the weekly initial jobless claims on April 2nd to assess the overall employment situation.
Concurrently, the Institute for Supply Management's manufacturing and non-manufacturing PMI readings will be crucial, especially their employment and prices paid components. Any signs that the US labor market is weaker than the Federal Reserve's current assessment could slightly rekindle expectations for interest rate cuts. Signals of labor market softness will be closely watched by policymakers, as the Fed has the dual mandate of stabilizing inflation and achieving maximum employment.
According to London Stock Exchange Group data, current money market pricing suggests a more than 20% probability of a Fed interest rate hike by 2026.
With US mid-term elections approaching, high oil prices are unfavorable for the Republican party. Support ratings for the Republicans and former President Trump have declined significantly since US and Israeli strikes against Iran. However, market caution regarding peace efforts is growing. Iran has repeatedly rejected a 15-point peace plan proposed by the White House, and with the US deploying additional troops to the Middle East, signals of escalating conflict are also strong. Nevertheless, substantial progress in ceasefire negotiations would boost market risk appetite and shift focus more squarely onto economic events.
**Crude Oil and Gold** International oil prices closed the week at their highest levels since the energy market was rocked by the Russia-Ukraine conflict in July 2022. Moves by the US President towards negotiations with Iran failed to alleviate market fears of large-scale supply disruptions in the Middle East. The WTI crude near-month contract rose 1.44% for the week to $99.64 per barrel, while the Brent crude near-month contract gained 0.34% to $112.57 per barrel.
Tony Sycamore, Market Analyst at IG, stated, "While statements about de-escalation and dialogue are clearly preferable to direct conflict, the market seems increasingly numb to verbal reassurances from the President. Extending deadlines essentially kicks the can down the road, postponing any substantive solution for reopening the Strait of Hormuz. This, in turn, only perpetuates the uncertainty weighing on markets and the global macroeconomy."
Macquarie Group has raised its full-year oil price forecast due to current supply disruptions, increasing its WTI price projection to $83 per barrel from $58, based on the assumption that the Strait of Hormuz remains closed for the entire month of April.
The institution suggested that if the conflict persists until the end of June, oil prices could reach $200 per barrel, stating, "If the Strait of Hormuz remains closed for an extended period, oil prices would need to rise to levels sufficient to destroy historically large segments of global oil demand."
Precious metals found a footing after earlier declines, but pressure remains elevated. The COMEX April gold futures contract fell 1.72% for the week to $4,492.00 per ounce, while COMEX silver futures gained 0.27% to $69.545 per ounce.
Expectations for further Federal Reserve rate hikes continue to dampen market sentiment. While gold is seen as an inflation hedge, higher interest rates benefit yield-bearing assets, and a stronger US dollar increases the cost of purchasing gold for investors holding other currencies.
Notably, in the two weeks following the outbreak of the current Middle East conflict, the Turkish central bank sold approximately 60 tonnes of gold, valued at over $8 billion. Carsten Menke of Julius Baer suggested that Poland might also consider selling gold reserves. He warned that passive selling is more concerning than active portfolio adjustments because such sales lack controllability, and he expects short-term market volatility to remain high.
**ECB Rate Hike Possibly Imminent** European Central Bank President Christine Lagarde previously indicated that even if the inflation overshoot caused by the current energy shock is "not overly persistent," it might still necessitate moderately tight policy from the ECB.
Unlike the US, which has a higher degree of energy self-sufficiency, Europe is highly dependent on oil and gas imports from the Middle East. Therefore, facing the energy price shock triggered by the Iran crisis, the ECB and the Bank of England have little choice but to manage the resulting ripple effects.
Due to the Easter holiday, the Eurozone trading week will be shortened. The preliminary March inflation data may offer the first glimpse into the impact of consumer prices from the month-long Middle East conflict and subsequent rise in oil prices. Germany will release its preliminary March inflation figures on March 30th, while France, Italy, and the overall Eurozone figures will follow on March 31st. All Eurozone CPI indicators for February, including two core inflation measures, showed slight increases. If inflation accelerates further this month, it could push policymakers towards favoring an earlier vote for a rate hike. Investors currently see approximately a two-thirds probability of a 25-basis-point hike at the ECB's April meeting, though it remains unclear if a majority of the Governing Council would support pre-emptive action.
This week, high energy prices combined with heightened rate hike expectations pushed UK government bond yields significantly higher. LSEG data indicates that current money market pricing suggests the Bank of England could implement three 25-basis-point rate hikes by 2026, with a 73% probability of a hike starting next month. This contrasts sharply with market expectations prior to the Middle East conflict, which had anticipated two rate cuts for the UK by 2026.
The Bank of England will release February data for mortgage lending and consumer credit on March 30th, followed by revised Q4 GDP figures on March 31st. Sandra Horsfield, economist at Investec, noted that while GDP data is a lagging indicator, it provides more granular information crucial for assessing the UK economy's starting position as it navigates the current Middle East situation.
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