Global Markets Jittery as Iran-Israel Tensions Escalate

Global financial markets face uncertainty as Iran's strike on Israel raises fears of escalating geopolitical tensions. Investors anticipate heightened volatility, with risks of rising oil prices, potential flight to safe-haven assets, and further stock market declines. The market reaction hinges on Israel's response and the potential for a cycle of retaliation, with crude oil serving as a barometer of market sentiment.

Global Markets Face Geopolitical Jitters Amid Iran-Israel Tensions

As markets gear up for the week ahead, geopolitical uncertainties cast a long shadow over investor sentiment, with the unprecedented weekend strike by Iran on Israel threatening to trigger a cycle of retaliation and escalate tensions in the Middle East.

The conflict, widely anticipated following Hamas' attacks on Israel in October, has heightened fears of Iran's involvement. As the conflict intensifies, experts predict a surge in oil prices, potentially exceeding $100 per barrel, alongside increased demand for safe-haven assets like Treasuries, gold, and the US dollar. Stock markets are expected to suffer further losses amid heightened risk aversion.

Despite Friday's flight to safety in anticipation of the strike, Iran's statement that the matter could be considered concluded and reports of President Biden assuring Israeli Prime Minister Netanyahu that the US would not support an Israeli counterattack have provided some solace.

"Investors instinctively seek refuge in safe-haven assets during such moments," said Patrick Armstrong, Chief Investment Officer at Plurimi Wealth LLP. "Market reactions will largely hinge on Israel's response. If Israel refrains from escalation, it could present an opportunity to acquire riskier assets at lower prices."

Bitcoin, a digital asset often considered a barometer of market sentiment, plunged almost 9% in the wake of the attacks on Saturday. However, it rebounded on Sunday, trading near $64,000. Equity markets in Saudi Arabia and Qatar posted moderate losses in thin trading, while Israel's equity benchmark oscillated between gains and losses before closing with a small advance.

"Middle Eastern markets commenced trading with relative tranquility following Iran's attack, perceived as a calculated response rather than an effort at escalation," said Emre Akcakmak, a senior consultant at East Capital in Dubai. "Nevertheless, the market impact could extend beyond the region due to knock-on effects on oil and energy prices, potentially influencing the global inflation outlook."

Investors now face the daunting task of assessing the likelihood of continued strikes and counter-strikes, with many seeking guidance from oil prices. Brent crude, the international benchmark, has surged almost 20% this year, trading above $90 per barrel.

While the current conflict has not directly impacted production, Red Sea attacks by Iran-backed Houthi rebels have disrupted shipping. Traders fear a wider conflict could severely disrupt tanker traffic through the Strait of Hormuz, the chokepoint for oil exports from the Persian Gulf.

Concerns about regional instability have reverberated through global markets. The S&P 500 Index recently suffered its steepest weekly decline since October, driven by higher-than-anticipated inflation and underwhelming bank earnings.

Bond markets face the prospect of energy price increases fueling inflation fears. While Treasuries typically rise in times of uncertainty, the threat of sustained high interest rates could limit their gains. US equity and bond futures are scheduled to open on Sunday at 6 p.m. New York time.

Meanwhile, gold has embarked on a relentless climb, gaining 13% this year to reach a record above $2,400 per ounce. Investors have also flocked to the stability of the US dollar, with an index of the currency rising 1.3% last week, marking its best performance since late 2022.

Market experts and analysts weigh in on the unfolding events:

• Erik Meyersson, Chief Emerging Markets Strategist at SEB: "Our oil analysts perceive limited signs of a geopolitical risk premium in oil prices thus far. This likely reflects market perceptions of low escalation risks to date. This equilibrium could be tested if Iran and Israel continue to engage in hostilities."
• Gonzalo Lardies, Senior Equities Fund Manager at Andbank: "A new era of uncertainty is unfolding, but markets partially priced this scenario on Friday. If the situation does not escalate further, the impact should be manageable. The risk lies in contagion effects within the region."
• Alfonso Benito, Chief Investment Officer at Dunas Capital: "Given Israel's robust air defense, I do not anticipate significant market declines. Defense stocks, oil, and gas are likely to rise, while airlines may face headwinds. Bonds will advance, but likely not excessively. Investors may capitalize on this opportunity to partially rectify recent gains."
• Joachim Klement, a Strategist at Liberum: "The response will largely hinge on Israel's actions today and the US's ability to restrain Benjamin Netanyahu. Geopolitics will overshadow central bank actions and strong US economic data in stock markets over the coming days. Hence, we anticipate a market pause until clarity emerges on the Iran-Israel situation. A shooting war between the two nations would prolong the market uncertainty."
• Mark Matthews, Strategist at Bank Julius Baer in Singapore: "Iran's advance warning of the attack and military analysts' assessment that it was executed with minimal casualties suggest a measured approach. I do not foresee a precipitous decline in Fed rate expectations or a surge in oil prices. Iran and the US aim to de-escalate the situation. Israel's response and Iran's subsequent reaction will be crucial. De-escalatory strikes from both sides could potentially end the conflict."
• Geoff Yu, Senior Strategist for EMEA Markets at BNY Mellon in London: "Even after recent buying following CPI data, there is scope for further dollar accumulation. Clients remain overweight the euro, Canadian dollar, and high-carry currencies like the Mexican peso. We will monitor these currencies for signs of rotation in favor of the greenback."
• Neil Shearing, Chief Economist at Capital Economics in London: "Events in the Middle East will likely contribute to the Fed's cautious approach to interest rate cuts, but it is unlikely to completely deter them. We expect the first cut in September. We also anticipate rate cuts from the ECB and BOE in June, assuming energy prices do not spike significantly in the coming weeks."

As the situation continues to evolve, investors worldwide will monitor geopolitical developments with bated breath. The potential for a cycle of retaliation could have far-reaching implications for global markets, with oil prices, safe-haven assets, and risk sentiment likely to bear the brunt of the impact.