At present, the escalation of tensions in the Middle East to broader conflicts may bring another impact to world economic growth and prevent the development of deflationary forces. Reuters discussed the topic today and conducted a deep analysis of the current situation and its impact on the market.
Reuters said that the market reaction is not yet clear, but the situation may change.
Dr. Hamza Medbe, Director of the Political and Economic Program at the Malcolm H. Kerkanegi Middle East Center in Beirut, said: "Whether this conflict is limited to a confrontation between Hamas and Israel, or whether it escalates to a conflict involving Iranian proxy armed groups, especially in the broader region, will be of great significance. This escalation may lead to an increase in oil prices and raise concerns about oil supply, And may lead to a global economic recession.
The following are some noteworthy financial areas summarized by Reuters.
1/Iran, then oil
Iran may increase its involvement in the Middle East conflict, and the United States may take measures to increase sanctions on Iranian oil.
Brent Belot, founder and chief investment officer of Cayler Capital hedge fund, said: "Cracking down on Iran's oil exports may immediately reduce the oil supply in the market by approximately 1-2 million barrels per day
If the United States sends troops into the Middle East, Belot predicts that oil prices may rise by $20 per barrel or even more.
Last week, oil prices rose by 7.5% and surged by 2% on Wednesday, reaching over $92 per barrel.
From October 1973 to March 1974, with Arab countries imposing an oil embargo on Israeli supporters, oil prices skyrocketed by over 300%.
Madison Farrell, strategist at JPMorgan Chase Private Bank, stated in a report: "Israel has better relations compared to other Arab countries, and global oil supply is less concentrated
Nadia Martin Wigan, director of commodity investment company Svelland Capital, also pointed out that regional conflicts may interfere with tanker routes around the Mediterranean Sea, the Black Sea and Türkiye.
2/Inflation soaring?
Inflation has eased somewhat, and the global interest rate hike is nearing its end.
The surge in oil prices (which reached $139 per barrel after the Russia Ukraine crisis last year) may halt the downward trend of inflation. Last week, natural gas prices surged by 45%, which is another worrying sign.
If Iran participates, it means that commodity prices will rise and external shocks will increase, which will become a triggering factor for reducing inflation prospects, "said Alicia Belardi, Director of Macroeconomic and Strategic Research for Emerging Markets at Amundi. She emphasized that this is not her basic expectation.
The long-term market indicators of inflation expectations in the United States and the eurozone indicate that inflation will remain above the target level of 2%.
Bond investors may be further impacted. The US S&P Composite Bond Index, an indicator of the performance of treasury bond bonds and corporate bonds, has fallen 14% from its peak in January 2021.
3/Strong USD?
The demand for safe haven has driven the appreciation of the US dollar and pushed up its exchange rate against other currencies. Last Friday, the Swiss franc performed its best against the euro since January.
If high oil prices and inflation trigger a US economic recession, Amundi's Belardi suggests that the US dollar may no longer be a unilateral bet.
Trevor Grissom, head of multi-asset at Royal Insurance Company London, said that any "global risk aversion" measures may also strengthen the yen as "Japanese investors withdraw funds domestically
4/Emerging Markets
Israel's currency, bond, and stock markets have been hit, as have Egypt, Jordan, Iraq, and to a lesser extent Saudi Arabia, Qatar, and Bahrain.
Omotond Laval, head of debt for emerging market companies at Barings, stated that "the Israeli-Palestinian conflict is only one factor that further suppresses emerging market sentiment," and she is cautiously optimistic that most other emerging markets are currently generally less sensitive to tensions.
But Jeff Grils of Aegon Asset Management warned that regional upgrades could easily lead to a 20% increase in oil prices, harming already impoverished oil importing countries.
5/Concerns of Technology Companies
Factors that are favorable for oil stocks may be unfavorable for large technology companies.
In 2022, the Russia Ukraine crisis pushed up oil prices, sparking inflation concerns and leading to an increase in bond yields. The MSCI index of global technology stocks followed the opposite trend as oil and gas stocks.
If the United States raises interest rates again to curb the inflationary impact of the latest conflict, Gleason of Royal London Insurance Company said that this model may reappear.
6/Potential disruption of infrastructure is also a risk
Deutsche Bank stated, "Egypt is a place where multiple intercontinental cables intersect on land, just like the Digital Suez Canal, where at least 17% of global internet traffic is transmitted through this route
At the same time, aviation stocks may be affected, while defense stocks may perform well. Since the Hamas attack on Israel on October 7th, the MSCI aviation stock index has fallen by about 5%. Aerospace and defense stocks rose nearly 6%.
