(Bloomberg) — Financial markets will worry about geopolitics in the new week, with much riding on whether Iran’s unprecedented weekend attack on Israel triggers retaliation.
Most read by Bloomberg
With investors already unsettled by persistent inflation and the prospect of higher interest rates in the longer term, the escalation of the Middle East crisis will create new volatility as trading resumes.
When Hamas attacked Israel in October, many market participants’ greatest fear was that Iran would ultimately be drawn into the fighting. As the conflict now intensifies, many expect oil prices to exceed $100 a barrel and are anticipating a flight to government bonds, gold and the dollar, as well as further losses in stock markets.
Nervousness could still be tempered by Iran’s statement that “the matter can be considered closed” and a report in which President Joe Biden told Israeli Prime Minister Benjamin Netanyahu that the US would not support an Israeli counterattack against Iran would support.
“The natural reaction of investors is to look for safe havens in moments like these,” said Patrick Armstrong, chief investment officer at Plurimi Wealth LLP. “Reactions will depend to some extent on Israel’s response. If Israel does not escalate from here, this could provide an opportunity to buy risky assets at lower prices.”
Bitcoin gave an early insight into market sentiment. The token fell almost 9% following the attacks on Saturday, but recovered on Sunday and traded near the $64,000 mark.
The stock markets in Israel, Saudi Arabia and Qatar recorded slight losses due to low trading volumes.
“Middle East markets opened relatively calmly following Iran’s attack, which was perceived as a measured retaliation rather than an attempt at escalation,” said Emre Akcakmak, senior adviser at East Capital in Dubai. “However, the market impact could extend beyond the Middle East due to secondary effects on oil and energy prices, potentially affecting the global inflation outlook.”
Investors will now weigh the risk of a strike-and-counter cycle, with many looking to oil as a guide to how to respond. Brent crude is already up nearly 20% this year and is trading above $90 a barrel.
While the conflict in the Middle East has not yet had an impact on production, attacks by the Iran-backed Houthis in the Red Sea have disrupted shipping. Traders are particularly concerned that an expanding conflict could hamper tanker shipments from the Persian Gulf through the Strait of Hormuz.
Concerns about unrest in the region have also spread to global markets. The S&P 500 is coming off its biggest weekly decline since October, driven by higher-than-expected inflation and disappointing bank profits.
In the bond market, traders will weigh the risk that more expensive energy bills could add to inflation fears. While government bonds tend to benefit in times of uncertainty, the threat of interest rates remaining high could limit moves. U.S. stock and bond futures open on Sunday at 6 p.m. New York time.
Meanwhile, gold prices are on the rise, rising 13% this year to reach a record high of over $2,400 an ounce. Investors also looked for the stability of the US dollar. An index of the currency rose 1.3% last week, its best performance since the end of 2022.
This is what investors and analysts say:
Gonzalo Lardies, senior equity fund manager at Andbank:
“A new environment of uncertainty is now emerging, but the market had already partially priced in this situation on Friday. So unless things get worse, the impact shouldn’t be very big. The risk is that the situation escalates and there is infection in the region.”
Alfonso Benito, Chief Investment Officer at Dunas Capital:
“Given the way Israel has defended its air shield, I would not expect a sharp decline. We should see a rebound in defense contractors, oil and gas, while airlines could decline. Bonds will rise, but I don’t think excessively. Investors could use this to partially correct the increases of the last few 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 with buying. Seasonally more difficult months are beginning.”
Joachim Klement, a strategist at Liberum:
“The response will depend heavily on Israel’s response today and whether the US succeeds in containing Benjamin Netanyahu.”
“In the next few days, stock markets will focus on the geopolitical situation and not on the actions of central banks or the strong economy in the US. Therefore, we expect the rally to stall until there is more clarity as the Iran-Israel situation calms down. If there is a violent war between Israel and Iran, the rally will stall for longer.”
Mark Matthews, strategist at Bank Julius Baer in Singapore:
“The good thing is that Iran warned of the attack in good time. Military analysts say this was done in a way that minimized casualties. I don’t understand why this would cause the Fed’s interest rate expectations to fall more or the price of oil to rise sharply. Iran is trying to defuse this, as is the USA. The key lies in Israel’s response and then Iran’s response to it. If Israel carries out a de-escalatory attack and then the Iranians carry out an even more de-escalatory attack, then it’s over.”
Geoff Yu, senior EMEA strategist at BNY Mellon in London:
“There is scope for further dollar accumulation, even with recent purchases following the CPI data. Our clients remain overweight the euro, the Canadian dollar and some high-interest currencies such as the Mexican peso, so we would look for a rotation in favor of the dollar here.”
Neil Shearing, chief economist at Capital Economics in London:
“We feel that events in the Middle East will provide further reason for the Fed to take a more cautious approach to rate cuts, but they will not deter it from a full cut. We expect the first move in September. And assuming energy prices don’t spike over the next month, we expect both the ECB and BOE to cut rates in June.”
– With support from Macarena Muñoz, Allegra Catelli, Alice Gledhill and Anthony Di Paola.
Most read by Bloomberg Businessweek
©2024 Bloomberg LP