Financial markets will face the new week fretting about geopolitics with much riding on whether Iran’s unprecedented weekend strike on Israel triggers rounds of retaliation.
When Hamas attacked Israel in October, the biggest fear for many market participants was that Iran would ultimately be drawn into the fighting. Now as the conflict widens, many say oil could surpass $100 (€94) a barrel and expect a flight to Treasuries, gold and the dollar, along with further stock-market losses.
A spike in nerves may still be tempered by Iran’s statement that “the matter can be deemed concluded” and a report that US president Joe Biden told Israeli prime minister Binyamin Netanyahu that the US won’t support an Israeli counterattack against Iran.
“Investors’ natural reaction is to look for safe-haven assets in moments like this,” said Patrick Armstrong, chief investment officer at Plurimi Wealth. “Reactions will be somewhat dependent on Israel’s response. If Israel does not escalate from here, it may provide an opportunity to buy risk assets at lower prices.”
Bitcoin gave an early insight into market sentiment. The token sank almost 9 per cent in the wake of the attacks on Saturday, only to rebound on Sunday and trade near the $64,000 mark.
Stocks markets in Israel, Saudi Arabia and Qatar posted modest losses under thin trading volumes.
“Middle Eastern markets opened with relative calm following Iran’s attack, which was perceived as a measured retaliation, rather than an attempt at escalation,” said Emre Akcakmak, a senior consultant at East Capital in Dubai. “However, the market impact might extend beyond the Middle East due to secondary effects on oil and energy prices, potentially influencing the global inflation outlook.”
Investors will now weigh the risk of a strike and counterstrike cycle, with many looking to oil as a guide for how to respond. Brent crude is already up almost 20 per cent this year and trading north of $90 a barrel.
Although the conflict in the Middle East hasn’t yet had any impact on production, Red Sea attacks by Iran-backed Houthis in the Red Sea have disrupted shipping. Traders mostly fear a widening conflict could disrupt tanker shipments from the Persian Gulf through the Strait of Hormuz.
Worries about turmoil in the region have also been filtering through global markets. The S&P 500 is coming off its biggest weekly decline since October on the back of higher-than-expected inflation and disappointing bank earnings.
In the bond market, traders will be weighing the risk that more expensive energy bills may add to swirling inflation fears.
Meanwhile, gold has been on a tear, gaining 13 per cent this year to hit a record above $2,400 an ounce. Investors have also sought the stability of the US dollar. An index of the currency rose 1.3 per cent last week, the best performance since late 2022.
“The reaction will very much depend on the reaction of Israel today and whether the US can manage to restrain Binyamin Netanyahu,” said Joachim Klement, a strategist at Liberum. “In the next couple of days, stock markets will focus on the geopolitical situation, rather than central bank action or the strong economy in the US. Hence, we expect the rally to stall until there is more clarity if the situation in Iran-Israel calms down. If we end up in a shooting war between Israel and Iran, then the rally will be stalled for longer.” – Bloomberg
