Financial markets will face the new week fretting over geopolitical issues, with the key being whether Iran’s unprecedented strike against Israel this weekend will trigger a round of retaliation.
With investors already rattled by persistent inflation and the prospect of higher and longer interest rates, the escalating crisis in the Middle East is expected to inject further volatility when trading resumes.
When Hamas attacked Israel in October, the biggest fear among many market participants was that Iran would ultimately be drawn into the fighting. Today, as the conflict widens, many believe that oil could exceed $100 a barrel and expect a flight to Treasuries, gold and the dollar, as well as to further stock market losses.
Nervousness may be further tempered by Iran’s declaration that “the matter can be considered settled” and a report that President Joe Biden told Israeli Prime Minister Benjamin Netanyahu that the United States would not support not an Israeli counterattack against Iran.
“The natural reaction of investors is to seek safe haven assets in times like this,” said Patrick Armstrong, chief investment officer at Plurimi Wealth LLP. “Reactions will depend somewhat on Israel’s response. If Israel does not step up its efforts, it could provide an opportunity to buy risky assets at lower prices. »
Bitcoin provided a first glimpse of market sentiment. The token fell nearly 9% following Saturday’s attacks, only to rebound on Sunday and trade near the $64,000 mark.
Stock markets in Israel, Saudi Arabia and Qatar posted modest losses amid low trading volumes.
“Middle East markets opened relatively calmly after the Iranian attack, which was seen as a measured retaliation rather than an attempt at escalation,” said Emre Akcakmak, senior consultant at East Capital in Dubai. “However, the market impact could extend beyond the Middle East due to secondary effects on oil and energy prices, which could influence the global inflation outlook.”
Investors will now weigh the risk of a cycle of strikes and counter-strikes, with many looking to oil as a guide for how to respond. Brent crude is already up nearly 20% this year and trading north of $90 a barrel.
Although the conflict in the Middle East has not yet had an impact on production, attacks in the Red Sea by the Iran-backed Houthis have disrupted shipping. Traders especially fear that a broader conflict could disrupt tanker shipments from the Persian Gulf via the Strait of Hormuz.
Concerns about unrest in the region have also spilled over into global markets. The S&P 500 just experienced its biggest weekly decline since October due to higher-than-expected inflation and disappointing bank results.
In the bond market, traders will weigh the risk of higher energy bills adding to swirling inflation fears. Although Treasuries tend to benefit during uncertain times, the threat of interest rates remaining high could limit moves. U.S. stock and bond futures will open at 6 p.m. New York time on Sunday.
Meanwhile, gold is on a strong rise, gaining 13% this year to hit a record above $2,400 an ounce. Investors are also looking for stability in the U.S. dollar. An index of the currency rose 1.3% last week, the best performance since the end of 2022.
Here’s what investors and analysts are saying.
Gonzalo Lardies, senior equity fund manager at Andbank: “A new environment of uncertainty is now opening up, but the market has already partially priced in this situation on Friday, so if it does not worsen, the impact should not be Very important. The risk is that the situation will worsen and that there will be contagion in the region.
Alfonso Benito, investment director at Dunas Capital: “I wouldn’t expect big declines given the way Israel has defended its air shield. We should see defense companies increase, oil and gas increase, while airlines may decline. Bonds will rise, but I don’t think excessively so. Investors could take advantage of this to partially correct the increases of recent months.”
Diego Fernandez, chief investment officer at A&G Banco: “I expect risk assets to trade lower at the open and we will be patient to buy. Seasonally more complicated months are beginning.
Joachim Klement, strategist at Liberum: “The reaction will depend a lot on how Israel reacts today and the ability of the United States to contain Benjamin Netanyahu. »
“In the coming days, stock markets will focus on the geopolitical situation rather than the action of central banks or the strength of the American economy. Therefore, we expect the recovery to stall until things become clearer if the situation in Iran and Israel calms down. If we end up in a war between Israel and Iran, the rally will be blocked for longer.”
Mark Matthews, strategist at Bank Julius Baer in Singapore: “The good thing is that Iran warned well in advance of the attack. Military analysts say this was done in a way to minimize casualties. I don’t see why this would lead to further lowering of Fed rate expectations or a sharp rise in the price of oil. Iran is trying to defuse this situation, as is the United States. The key is knowing what Israel’s response will be, and then Iran’s response. If Israel carries out a de-escalation strike, and the Iranians then launch an even more de-escalation strike, then it will be over. »
Geoff Yu, senior EMEA strategist at BNY Mellon in London: “There is room to accumulate more dollars, even with recent buying after the CPI data. Our clients remain overweight on the euro, the Canadian dollar and certain high carry currencies like the Mexican peso, so this is where we would watch for a rotation in favor of the greenback.
Neil Shearing, chief economist at Capital Economics in London: “Our sense is that events in the Middle East will strengthen the case for the Fed to take a more cautious approach to rate cuts, but they will not prevent it.” not to completely reduce its rates. We are planning the first move in September. And assuming energy prices don’t soar over the next month, we expect the ECB and BOE to make cuts in June.”