The combination of regional conflict in the Middle East and rising unemployment in the United States puts markets at risk of a "whipsaw," says Stephen Roach, a senior fellow at Yale Law School's Paul Tsai China Center.
Conflict in the Middle East escalated on Tuesday, after Iran launched a ballistic missile attack on Israel after killing Hezbollah leader Hassan Nasrallah and an Iranian commander in Lebanon.
Most Asian markets fell on Wednesday, tracking overnight losses on Wall Street as investors worried about rising tensions in the Middle East.
"Markets really don't know where to turn," Roach said, adding that conflicts in the Middle East are adding to inflationary risks at a time when global central banks are starting to ease monetary policy.
"We're seeing a significant increase in volatility and markets moving back and forth really dramatically," Roach told CNBC's "Squawk Box Asia" on Wednesday.
Impact of the oil market
The Israel Defense Forces said its troops launched new strikes against Hezbollah targets in Lebanon in response to an Iranian missile attack on Tuesday night.
Whether there will be a lasting impact on inflation remains to be seen, Santander chief economist Stephen Stanley said, adding that the oil market would be "more significantly affected" if tensions rise.
According to the Energy Information Administration, Iran is the third-largest producer in the Organization of the Petroleum Exporting Countries, producing about four million barrels of oil per day. Oil prices jumped more than 5% after the missile strike before climbing 2%.
Market Volatility
Calvin Tay, regional chief investment officer at UBS Global Wealth Management, said whether the markets' risk-off move will continue for a long time depends on several key factors, one of which is Israel's response to the Iranian attack.
"If it's a measured response, one that's not designed to cause massive damage and kill ... things in the Middle East might actually settle down a little bit ... you won't get this escalation for fear of a regional-wide war in the Middle East," he said. . .
Roche, meanwhile, said growth in the Middle East poses upside risks to oil prices and inflation. "Central banks will certainly have to think twice about continuing the path to more housing," he told CNBC.
U.S. The Federal Reserve projected to cut interest rates by half a point at the next two policy meetings this year, according to the central bank's so-called dot plot from its September meeting.
Traders are also looking to Friday's US payrolls data for further clues on the state of the economy after the US Federal Reserve's jumbo rate cut in September. A higher-than-expected unemployment rate could prompt the Fed to accelerate the easing cycle to achieve a softer landing.
The unemployment rate is expected to come in at 4.2% in September, unchanged from the August figure, according to data from a Reuters poll on LSEG. The unemployment rate hit a three-year high of 4.3% in July, a dramatic increase from a five-decade low of 3.4% in April 2023.
U.S. The Federal Reserve projected to cut interest rates by half a point at the next two policy meetings this year, according to the central bank's so-called dot plot from its September meeting.
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