Financial markets will commence the new week beset by geopolitical concerns, with a significant focus on the probability of retaliation ensuing from Iran’s uncommon weekend strike on Israel. A major concern for many market players, during Hamas’s assault on Israel in October, was that Iran might eventually be lured into the combat. However, as the conflict expands, numerous people predict that the oil could exceed $100 (€94) per barrel and anticipate a shift towards treasuries, gold, and the dollar, coupled with continued losses in the stock market.
Nevertheless, a rise in unease might still be assuaged by Iran’s declaration that “the situation can be deemed resolved”, and an account stating that US president Joe Biden assured Israeli prime minister Binyamin Netanyahu that the US would not back an Israeli response against Iran.
According to Patrick Armstrong, the chief investment officer at Plurimi Wealth, investors naturally gravitate towards safe-haven assets during such unexpected situations. Israel’s response will significantly influence the investor reactions. If Israel chooses not to escalate further, it may present an opportunity to purchase risk assets at lower rates.
Bitcoin’s recent fluctuation provides an early view into market sentiment, falling nearly 9 percent following the Saturday attacks, before recovering on Sunday to trade near the $64,000 mark.
Stock markets in Israel, Saudi Arabia, and Qatar exhibited minor losses amidst unremarkable trading volumes. As Emre Akcakmak, a senior consultant at East Capital in Dubai, pointed out, Middle Eastern markets began with relative tranquillity post-Iran’s assault, which many viewed as measured retaliation rather than an escalation attempt. Regardless, the global inflation outlook might be influenced by secondary effects on oil and energy prices, potentially extending the market impact beyond the Middle East.
Investors must now evaluate the risk posed by a potential cycle of strikes and counterstrikes, with oil prices serving as a significant indicator of how to react. Brent crude has already seen a nearly 20 percent increase this year and trades above $90 a barrel.
Though the Middle East conflict has not yet affected production, the attacks by Iranian-backed Houthis in the Red Sea have caused shipping disruptions. The primary concern among traders is that widened conflict might interrupt tanker shipments via the Strait of Hormuz from the Persian Gulf.
Concerns about regional turmoil have also been trickling into global markets. Amid heightened inflation and unsatisfactory bank earnings, the S&P 500 faces its largest weekly drop since October.
In the arena of bonds trading, the possibility that mounting energy costs may contribute to intensifying concerns over inflation is under careful scrutiny. Amidst this, gold has performed impressively, recording a 13% increase this year to reach a new high of over $2,400 per ounce. Investors have simultaneously gravitated towards the firmness of the US dollar, with the currency’s index escalating by 1.3% last week, its standout performance since the tail end of 2022.
Joachim Klement, a strategist from Liberum mused that the reactions would largely depend on how Israel responds (today) and the ability of the US to keep Binyamin Netanyahu in check. He added that the primary focus of stock markets in the upcoming days would be global politics, sidelining actions by central banks or America’s robust economy. As such, they anticipate a pause in the rally until more light is shed on the Israel-Iran situation. Klement stressed that, in the face of a military conflict between Israel and Iran, the pause in rally could potentially extend over a longer period.