As they evaluated how the most recent escalation of hostilities would affect the world economy, investors warned that a U.S. attack on Iranian nuclear sites may drive oil prices much higher and cause a hasty flight to safety.
Even as Iran stepped up its missile attacks on Israel in response to the abrupt, extensive U.S. participation in the fight, the response in the Middle East stock markets, which trade on Sunday, indicated investors were assuming a benign situation.
Trump declared that Iran’s “key nuclear enrichment facilities have been completely and totally obliterated” and described the attack as “a spectacular military success” in a nationally televised speech.
If Iran would not agree to peace, he suggested, the U.S. military may hit other targets in Iran.
Iran issued a warning of “everlasting consequences” and stated that it had all the means to protect itself.
Although there was still a lot of ambiguity on how the battle would play out, investors said they anticipated that the U.S. engagement would lead to a selloff in stock markets and a potential push for the dollar and other safe-haven assets when major markets reopen.
“I believe oil will open higher, and I think the markets will be initially alarmed,” stated Mark Spindel, Potomac River Capital’s chief investment officer.
“A damage assessment will take some time, and we do not currently have one.
We’re engaged, despite his description of this as “done.” “What’s next?” “Yes,” Spindel answered.
“I believe that because Americans worldwide will suddenly be exposed, uncertainty will envelop the markets.
He went on to say, “It will increase volatility and uncertainty, especially in oil.”
The price of ether, the second-largest cryptocurrency and the new barometer of civilian investor mood after bitcoin, which is now owned primarily by institutions, was one indication of how markets might respond in the upcoming week.
Sunday’s 5% decline brought Ether’s losses since the initial Israeli strikes on Iran on June 13 to 13.
However, the key indexes in Qatar, Saudi Arabia, Kuwait, and Israel’s Tel Aviv main index were at all-time highs, suggesting that most Gulf stock markets were unaffected by the early morning attacks.
PRICES FOR OIL AND INFLATION
Markets would be particularly concerned about how the events in the Middle East would affect oil prices and, consequently, inflation.
A spike in inflation may reduce the likelihood of short-term interest rate reduction and erode consumer confidence.
In the more likely scenario, Iran would retaliate by attacking American interests in the Middle East, such as Gulf oil infrastructure in countries like Iraq or interfering with ship passages through the Strait of Hormuz, according to Saul Kavonic, a senior energy analyst at the Sydney-based equity research firm MST Marquee.
The main export route for oil-producing nations like Saudi Arabia, the United Arab Emirates, Iraq, and Kuwait is the Strait of Hormuz, which separates Oman from Iran.
“Much depends on how Iran responds in the coming hours and days, but this could set us on a path towards $100 oil if Iran responds as they have previously threatened to,” said Kavonic.
The S&P 500 on Thursday barely altered after initially declining when Israel commenced its attacks on Iran on June 13, but global benchmark Brent crude futures had surged as much as 18% since June 10 and reached a near five-month high of $79.04 on Thursday.
Jamie Cox, managing partner at Harris Financial Group, acknowledged in remarks following Trump’s announcement of the strikes that oil prices will probably rise in response to the original announcement.
However, Cox said that prices will probably level off in a few days because Iran would look to negotiate a peace agreement with the US and Israel as a result of the assaults.
“With this demonstration of force and total annihilation of its nuclear capabilities, they’ve lost all of their leverage and will likely hit the escape button to a peace deal,” Cox stated.
A sharp increase in oil prices, according to economists, might hurt the world economy, which is already under stress from Trump’s tariffs.
However, history indicates that any decline in stocks could be short-lived.
Stocks initially sank but quickly rebounded to trade higher in the upcoming months during previous notable instances of Middle East tensions reaching a boiling point, such as the 2003 Iraq war and the 2019 attacks on Saudi oil infrastructure.
According to data from Wedbush Securities and CapIQ Pro, the S&P 500 fell 0.3% on average in the three weeks after the conflict began but increased 2.3% on average two months later.
DOLLAR TROUBLES
Concerns over waning U.S. exceptionalism have caused the U.S. dollar to plummet this year; an intensification of the dispute could have conflicting effects.
According to economists, the dollar would initially gain from a safety buy-in when the United States directly intervenes in the Iran-Israel conflict.
“Is there a flight to safety visible?
Steve Sosnick, chief market analyst at IBKR in Greenwich, Connecticut, stated that this would indicate a decline in rates and a strengthening of the dollar.
“The question is how much, and it’s difficult to picture stocks not reacting negatively. Whether or not oil prices rise will depend on Iran’s response.
