Thus, Israel and Iran find themselves in a fast-escalating tit-for-tat. Since one week ago, Israeli airstrikes and missile attacks have increased, as today is the fourth consecutive day of attacks. The recent escalations have led to hundreds of civilian deaths, and fears that this could lead to greater regional conflict. On Tuesday, bond markets responded, but despite this, global stock markets have shown surprising resilience, with stocks continuing a winning streak into Monday.
These strikes follow last week’s unprecedented series of Israeli airstrikes targeted at Iranian forces. Perhaps the most remarkable attack was the drone strike targeting the Shahran oil depot in Tehran. That attack not only set ablaze several production facilities but sent massive plumes of smoke into the air, increasing anxiety over potential energy supply chain disruptions. In response, Iran launched its first missile attack directly into Israeli territory, dramatically increasing hostilities between the two countries.
As a response to such violence, Israel’s defense minister declared a “special situation,” attesting to the severity and escalatory nature of this conflict. Observers note that the Strait of Hormuz—a crucial oil transit route where millions of barrels are transported daily—lies at the center of these geopolitical tensions. The chance of such disruptions along this critical corridor sends chills throughout international energy markets.
Unbelievably, given these ominous turns of events, the Tel Aviv 35 index was up 1% on Monday. This is especially notable after it had gone down by 1.5% the week before. Analysts from Deutsche Bank noted that both Israel and Iran have so far avoided taking “the most extreme escalatory steps.” As Jim Reid, a strategist at Deutsche Bank, said, such geopolitical shocks are occurring with increasing frequency. Without the situation escalating further, he says what’s happening now won’t have a major effect on market U.S. No.
“As geopolitical shocks are becoming more frequent it seems it’s now at least a yearly occurrence that we refer to our equity strategists’ work on the impact of such shocks and how long it takes for the market to recover from them.” – Jim Reid
Reid pointed out that historically, after such shocks, markets generally retreat an average of 6% within three weeks. They tend to recover in the next three-week period. Some other strategists today are leery about mispricing risks from brewing flames of continuing wars in the Middle East, among other concerns.
Russ Mould, investment director at AJ Bell, warned of underestimating “the risk of a major conflagration in the Middle East,” suggesting that markets may not be fully accounting for the potential fallout from the conflict. He was clear that things are still very much in flux and complicated.
“This is partly because there are so many moving parts and geopolitical considerations, and partly because the potential outcomes are so unthinkable.” – Russ Mould
David Roche, a strategist at Quantum Strategy, echoed concerns about the longevity of the conflict, stating that it “will last longer than the Israeli lightning-strikes that the market is used to.” He assumes there will be some period of continued hostilities before getting to that point, warning investors to get ready for significant market turbulence.
Energy markets seem to be the most sensitive to news of the attacks, as concerns on rising supply have increased market prices. As analysts at Kidder Peabody point out, even the hint of major disruptions in that *p.erilous* bottleneck would be enough to send oil and share prices soaring.
“In a worst case, oil and share prices would be the least of our worries.” – Russ Mould
Green deal sceptic Philippe Gijsels was surprised at the modest market reactions so far. He cautioned that expectations risk being dashed if things don’t turn around and tensions worsen.
“Still, the market reaction has been very modest, so there is room for disappointment if things were to escalate.” – Philippe Gijsels
Today’s dynamic and complex investor landscape has created a treacherous battleground for investors who are dealing with massive geopolitical turmoil. Fitch has both encouraged investors to treat energy-related assets as a safe harbor in an otherwise tumultuous market.
“A lull is the most likely outcome before later escalation when Iran rejects US Trump’s overtures. The market is likely to mistake the lull for lasting peace. I would use the lull to buy into energy assets as a safe haven.” – David Roche