Iran: Early Considerations on Market Impact

The recent strikes in Iran by the U.S. and Israeli represent a substantial escalation in the Middle East conflict. The situation certainly exceeds prior containment assumptions and seems to be geared toward regime-level objectives. The actions are more expansive than the conflict last year, and the situation is rapidly evolving and fluid. As such, there is a considerable amount of uncertainty, not just related to the conflict itself but also the impact on global financial markets.

Today’s weekly market commentary examines the potential economic and market impact from the Iranian conflict and provides an initial interpretation of events. The piece is more text heavy than our typical attachment, so below is a high-level summary of the six areas the author highlights.

Oil Market Impact

• The primary economic concern is oil prices.
• Shipping through the Strait of Hormuz has largely stopped which has restricted global supply.
• “Should the Strait of Hormuz remain closed for a month, commodity analysts’ estimates suggest oil prices would likely rise between US$10 and US$20 per barrel.” – OMM – 0326
• Several factors may temporarily cushion the impact:
  • Excess oil supply prior to the crisis.
  • Alternative pipeline capacity.
  • U.S. Strategic Petroleum Reserve.
  • Seasonal decline in winter energy demand.

Inflation and Central Bank Policy

• Higher oil prices could increase inflation and inflation expectations globally.
• “Similar considerations should lead investors to price a less dovish stance by the Federal Reserve (Fed), the European Central Bank and other major central banks.” – OMM – 0326
• Historical comparisons with the oil shocks of 1970s raise concerns about a resurgence of inflation, though the U.S. energy position is stronger today.

Currency Markets

• The U.S. dollar is likely to strengthen in the short term due to:
  • Safe-haven demand.
  • Potentially tighter monetary policy.
  • The U.S. being a major energy producer.
• Other safe-haven currencies may also benefit.

Bond Markets

• U.S. Treasuries may see safe-haven inflows, but inflation concerns could limit price gains.
• Markets may reduce expectations for interest-rate cuts, potentially pushing long-term yields higher.

Emerging Markets

• Emerging markets (EM) may experience significant pressure after strong performance earlier in the year.
• A widening divide could appear between:
  • Oil-exporting EM economies (more resilient).
  • Oil-importing EM economies (more vulnerable).
• Stronger USD and higher U.S. interest rates could also weigh on EM assets.

Global Growth Outlook

• Risks to global growth will intensify the longer the conflict goes on; however, my view is that it would take a substantial and prolonged shock to oil supply and prices to trigger a global recession.” – OMM – 0326
• Compared with other regions:
  • Europe appears more vulnerable.
  • The U.S. economy may remain relatively resilient.