Sagarika Jaisinghani
10 min read
In This Article:
(Bloomberg) — Traders are forecasting a drop in stocks, a jump in crude prices and possibly a strengthening of the dollar as investors head for safety in the wake of the US attack on Iran’s three main nuclear sites.
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Concern that the war will intensify even further is likely to push equity prices lower, while bonds may get a boost, market watchers say. The moves will be bigger if Iran responds with steps such as blocking the Strait of Hormuz, a key passage for oil and gas shipments, or attacking US forces in the region, they say.
“The initial reaction will be a flight to safety and equities will probably be weaker,” said Neil Birrell, chief investment officer at Premier Miton Investors. “The level that stock markets are standing at, they’re definitely going to face increased risk, there’s no doubt about that.”
Market reaction has been muted since Israel’s initial assault this month: Even after falling for the past two weeks, the S&P 500 is only about 3% below its all-time high from February. Investors expect the conflict to be be localized, with no wider impact on the global economy, said Evgenia Molotova, a senior investment manager at Pictet Asset Management.
“But it all depends on how the conflict develops and things seem to be changing by the hour,” she said. “The only way they take it seriously is if the Strait of Hormuz gets blocked because that will affect oil access.”
Iran has vowed to impose “everlasting consequences” for the bombing and said it reserves all options to defend its sovereignty.
Still, downside is likely to be limited because some market participants have been preparing for a worsening conflict. The MSCI All Country World Index has pulled back 1.5% since Israel attacked Iran on June 13. Fund managers have reduced their stock holdings, shares are no longer overbought and hedging demand has increased, meaning a deep selloff is less likely at these levels.
The biggest market reaction since the start of the escalation has been in oil, with Brent futures jumping 11% to $77 a barrel. Traders are preparing for another surge in crude prices even as it’s unclear where the crisis goes from here. That rise is expected to restart on Monday, after the US assault dramatically raised the stakes in a region that accounts for a third of global oil output.
