The upcoming week in financial markets is set to be overshadowed by geopolitical tensions, following an unprecedented attack by Iran on Israel over the weekend, sparking concerns of further retaliatory actions.
Investors, already on edge due to persistent inflation and the anticipation of enduring high interest rates, are bracing for increased market volatility as the situation in the Middle East escalates. The conflict's expansion has led to predictions of oil prices potentially exceeding $100 a barrel, with investors likely seeking refuge in Treasuries, gold, and the dollar, amidst anticipated declines in stock markets.
However, the tension could be mitigated by Iran's declaration that the conflict could be considered over, alongside reports of President Joe Biden advising Israeli Prime Minister Benjamin Netanyahu against a counterstrike on Iran. According to Patrick Armstrong, chief investment officer at Plurimi Wealth LLP, investors might view the absence of further escalation as an opportunity to acquire risk assets at lower prices.
Early market reactions were evident with Bitcoin's price fluctuation, dropping almost 9% after the attack but recovering to trade around the $64,000 mark. Stock markets in Israel, Saudi Arabia, and Qatar experienced slight losses amidst low trading volumes.
Emre Akcakmak, a senior consultant at East Capital in Dubai, noted that Middle Eastern markets opened relatively calmly following Iran's attack, perceived more as measured retaliation than an escalation attempt. Nonetheless, the broader market impact could extend globally, particularly affecting oil and energy prices and thus the global inflation outlook.
Investors are now assessing the potential for a cycle of strikes and counterstrikes, with many looking towards oil prices as a key indicator of market response. Brent crude has seen a nearly 20% increase this year, trading above $90 a barrel. While the Middle East conflict has not yet impacted production, concerns remain over possible disruptions to tanker shipments, especially through the strategic Strait of Hormuz.
Global markets are feeling the effects of regional turmoil, with the S&P 500 experiencing its most significant weekly drop since October, driven by higher-than-expected inflation rates and disappointing bank earnings. In the bond market, the potential for rising energy costs to exacerbate inflation fears is being closely watched. Although Treasuries usually gain during uncertain times, the prospect of sustained high interest rates could temper their appeal. U.S. equity and bond futures are set to open in anticipation of these developments.
Gold has surged 13% this year, reaching a record high of over $2,400 an ounce, as investors seek stability in the US dollar, which has strengthened significantly.
Market analysts and investors are closely monitoring the situation, with the consensus being that the market had already partially priced in the current level of uncertainty. The focus now shifts to potential escalations and their impact on regional stability and global markets.
