The Middle East conflict and U.S. unemployment pose a threat to market stability, warns Yale economist Stephen Roach.

• Stephen Roach, a senior fellow at Yale Law School's Paul Tsai China Center, warns that markets are at risk of being "whipsawed" by the confluence of regional conflict in the Middle East and rising unemployment in the United States.
• On Tuesday, the conflict in the Middle East intensified as Iran retaliated against Israel with a ballistic missile attack after the assassination of Hezbollah leader Hassan Nasrallah and an Iranian commander in Lebanon.
• Roach stated that conflicts in the Middle East are increasing inflationary risks, which is happening at the same time when global central banks are beginning to loosen monetary policy.

Stephen Roach, a senior fellow at Yale Law School's Paul Tsai China Center, warns that markets are at risk of being "whipsawed" by the confluence of regional conflict in the Middle East and rising unemployment in the United States.

On Tuesday, the conflict in the Middle East intensified as Iran retaliated against Israel with a ballistic missile attack after the assassination of Hezbollah leader Hassan Nasrallah and an Iranian commander in Lebanon.

On Wednesday, most Asian markets declined, mirroring losses on Wall Street the previous night, as investors worried about escalating tensions in the Middle East.

Roach stated that conflicts in the Middle East are increasing inflationary risks, which is happening at the same time when global central banks are beginning to loosen monetary policy.

On Wednesday, Roach stated on CNBC's "Squawk Box Asia" that we can expect substantial fluctuations and markets that are rapidly oscillating.

Oil market impact

In response to Iran's missile attack Tuesday night, the Israel Defense Forces commenced new strikes against Hezbollah targets in Lebanon.

Stephen Stanley, chief economist at Santander, stated that the lasting effects on inflation are uncertain, but the oil market will be significantly impacted if the tension escalates.

The Energy Information Administration reports that Iran is the third-largest producer among the Organization of the Petroleum Exporting Countries, with a daily production of nearly four million barrels of oil. Following the missile strike, oil prices rose by more than 5%, before tapering to a 2% increase.

Markets volatility

The duration of the markets' risk-off move depends on several key factors, including Israel's response to Iran's attacks, according to Kelvin Tay, regional chief investment officer at UBS Global Wealth Management.

"If the response is not intended to cause widespread harm and death, the situation in the Middle East may improve, preventing a regional-wide war," he stated.

Roach stated that the increase in the Middle East may increase the risk of oil prices and inflation, which may prompt central banks to reconsider their decision to continue with further accommodation.

The Federal Reserve is projected to reduce interest rates by half a point in the next two meetings, as indicated by the central bank's dot plot from the September meeting.

U.S. payroll data on Friday will provide traders with more insights into the economy's condition following the U.S. Federal Reserve's September rate cut. If the unemployment rate exceeds expectations, the Fed may speed up the easing cycle to prevent a hard landing.

The unemployment rate in September is predicted to remain at 4.2%, according to a Reuters poll on LSEG, the same as the previous month. Despite a significant increase to 4.3% in July, which was the highest in nearly three years, the unemployment rate has since decreased to 3.4% in April 2023.

The duration of dockworkers' strikes on the U.S. East and Gulf coasts could contribute to additional market volatility, according to Tay.

Nearly half of the country's ocean shipping has been halted due to a large-scale strike by dockworkers at ports from Maine to Texas, which is expected to disrupt global supply chains, Reuters reported.

"The port's disruption and work stoppage will have a significant economic impact, and the longer it lasts, the faster the economic damage will increase, according to Peter Tirschwell of S&P Global Market Intelligence."

The quote from Kelvin Tay, regional chief investment officer at UBS Global Wealth Management, has been corrected in this updated story.