Financial Markets Brace for Fallout as Iran’s Attack on Israel Rattles Investors: What to Expect

Financial markets around the world are on high alert as tensions in the Middle East escalate following Iran’s unprecedented strike on Israel over the weekend. With investors already concerned about inflation and the possibility of higher interest rates, the growing crisis in the region is expected to bring fresh volatility to trading.

When Hamas attacked Israel in October, many market participants feared that Iran would be drawn into the fighting. Now, as the conflict widens, experts predict that oil prices could surpass $100 a barrel, with a potential flight to safe-haven assets such as Treasuries, gold, and the US dollar. Stock markets in Israel, Saudi Arabia, and Qatar have already posted modest losses due to the uncertainty.

Despite these concerns, some analysts believe that the spike in nerves may be tempered by Iran’s statement that the matter is resolved, along with reports that US President Joe Biden assured Israeli Prime Minister Benjamin Netanyahu that the US will not support an Israeli counterattack. Patrick Armstrong, Chief Investment Officer at Plurimi Wealth LLP, believes that if Israel does not escalate the situation further, it may present an opportunity for investors to buy risk assets at lower prices.

The impact of the crisis can already be seen in the cryptocurrency market, as bitcoin initially sank almost 9% following the attacks, only to rebound and trade near the $64,000 mark. The turmoil in the region has also had an effect on global markets, with the S&P 500 experiencing its biggest weekly decline since October.

Looking ahead, investors will be closely monitoring the risk of a strike and counter-strike cycle, with oil prices serving as a guide for market response. Brent crude prices have already risen almost 20% this year, trading above $90 a barrel. Additionally, concerns about disruption to shipping due to attacks in the Red Sea by Iran-backed Houthis have led to fears of potential disruptions to tanker shipments through the Strait of Hormuz.

Worries about the Middle East crisis have also impacted other markets. Gold, for example, has gained 13% this year, reaching a record above $2,400 an ounce, as investors seek stability. The US dollar has also seen increased demand, with the currency index rising 1.3% last week.

Amidst this uncertain backdrop, investors and analysts have shared their views on the situation. Gonzalo Lardies, Senior Equities Fund Manager at Andbank, believes that if the situation does not worsen, the market impact should not be significant. However, he warns of the risk of escalation and contagion in the region. Alfonso Benito, Chief Investment Officer at Dunas Capital, expects defense, oil, and gas companies to rise, while airlines may face declines. Diego Fernandez, Chief Investment Officer at A&G Banco, suggests being patient before buying risk assets due to the beginning of more complicated months. Joachim Klement, a strategist at Liberum, emphasizes that the reaction will depend on Israel’s response and the ability of the US to restrain Benjamin Netanyahu.

Mark Matthews, Strategist at Bank Julius Baer in Singapore, remains cautiously optimistic, stating that Iran and the US are attempting to defuse the situation. He believes that if Israel conducts a de-escalatory strike and Iran responds in kind, the crisis may be resolved. Geoff Yu, Senior Strategist for EMEA Markets at BNY Mellon in London, suggests that there is scope for further dollar accumulation, especially if clients rotate away from euro, Canadian dollar, and high-carry currencies. Neil Shearing, Chief Economist at Capital Economics in London, believes that the events in the Middle East will push the US Federal Reserve to adopt a more cautious approach to rate cuts, but they won’t prevent cuts altogether.

As the crisis continues to unfold, it is clear that the implications extend beyond the Middle East. Investors and market participants will need to stay vigilant and closely monitor geopolitical developments, the impact on oil prices, and the potential for further disruption in global markets.

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