Wider conflict in the Middle East may lead to rise in inflation: BoB Report

Tensions between Israel and Iran have sent shockwaves through global markets, triggering a wave of uncertainty and volatility. Asian markets find themselves in the red, currencies are trading lower, and oil prices have seen a noticeable uptick.

India's Sensex experienced a decline in last 4 sessions, particularly affecting consumer durables and banking stocks. India's 10-year yield remained flat initially but is now trading higher at 7.21 per cent, reflecting concerns over heightened tensions in the Middle East and their potential economic ramifications.

The escalating conflict has spurred a flight to safe-haven assets, with gold, the dollar, and the yen all experiencing significant gains. Analysts warn that a broader conflict in the Middle East could have far-reaching consequences, potentially leading to a surge in global commodity prices and exacerbating inflationary pressures.

Such developments pose a significant challenge to ongoing efforts to combat inflation, with the possibility of Federal Reserve rate cuts now seemingly pushed further into the future.

Amidst this backdrop of geopolitical tension, labor market conditions in the United States have remained tight, with jobless claims holding steady at 212,000, slightly below the estimated 215,000.

However, existing housing sales in the US have declined by 4.3 per cent, adding further complexity to the economic outlook.

In Japan, Bank of Japan Governor indicated the possibility of more rate hikes to counteract the inflationary impact of a depreciating yen, despite a slight easing in the core Consumer Price Index (CPI) from 2.8 per cent in February to 2.6 per cent in March.

Despite the prevailing uncertainty, global stocks closed higher, as investors monitored major developments including geopolitical tensions in the Middle East, hawkish comments from Fed officials, and US jobless claims.

The impact of these geopolitical tensions is evident in the currency markets, with the Dollar Index (DXY) registering a 0.2 per cent increase following hawkish remarks from Federal Reserve officials. The euro depreciated by 0.3 per cent amidst expectations of rate cuts by the European Central Bank (ECB) preceding those of the Fed.

Meanwhile, the Indian Rupee (INR) remains near record lows amid a prevailing global risk-off sentiment, further weakening today alongside other Asian currencies.In the bond markets, except for Japan and China which experienced a decline, global yields rose.

The US 10-year yield witnessed the most significant increase, climbing by 5 basis points as Fed officials advocated for a cautious approach towards rate adjustments. Germany's 10-year yield also saw a rise of 3 basis points despite hints of an impending rate cut by an ECB policymaker in June.