Weekend de-risking or the start of something more ominous

Over the past two Fridays, there has been a growing inclination among investors to reduce risk, which appears to be a response to mounting concerns regarding the potential escalation of the conflict in the Middle East. Today, we are witnessing a similar trend, only this time driven by actual early indicators of heightened tensions following the US's targeted strikes on two Iran-linked facilities in Syria. US authorities described these strikes as "precision self-defence" actions in response to an increase in attacks on US troops in the region. While the US's start of a full-court press against Iranian proxies is occurring concurrently with the Israel-Hamas conflict, US officials are emphasizing the distinction between the two situations; however, the markets are not.

In addition, investors' ultimate fear, which could trigger a broader conflagration, is starting to unfold as Israel continued its ground raids into Gaza amid growing indications that the military was preparing for a large-scale operation. The Israel Defense Forces (IDF) released footage on Friday, showcasing ground forces conducting targeted raids in Gaza for the second consecutive day. The IDF also reported the use of jet fighters and unmanned drones to target Hamas positions. The situation in the region remains tense.

Not surprisingly, the rebound in stocks faltered, with the S&P 500 extending its decline from its July peak to 10%, a level often referred to as entering correction territory as fattening tail risks abound with factors like the conflict in Gaza, a strong US dollar, surging interest rates, and excessive government spending contributing to market stress. The most unambiguous indication the market is spooked is the surge in gold prices.

Even the Tadawul struggles to find its footing despite relatively stable crude oil prices. 

Sorry folks, global markets are not experiencing technical sell-offs but perhaps showing early warning signs of something more sinister. Indeed, one look at cross-asset price action tells you global markets are quaking in their boots about a broader regional and even global spillover from the Israel-Hamas. conflict

Gold has taken a moonshot, breaching the psychological and technical $2000 level, as the prospect of direct US military participation increases. Generally, events with direct US involvement tend to have a more considerable impact on gold, partly as investors seek bullion as a hedge of last resort.

Oil, on the other hand, is well-bid but fails to breach the recent October highs. With the increased likelihood of a direct confrontation involving Iran or Hezbollah, one could argue that crude oil prices should be substantially higher. However, concerns about demand stemming from China and Europe and perhaps the notion that as long as the conflict remains confined to Gaza, there isn't an immediate and visible threat to the oil supply have restrained prices.

Our model is somewhat confused about whether the lack of a " war bid " in oil is a recessionary signal or an efficient market waiting for an escalation that imperils supply before driving prices materially higher.