Banks Shrug Off Market Risk From Israel-Iran Conflict
Israel and Iran are in an unprecedented direct conflict, exchanging a barrage of attacks in the past few days. However, banks are unworried about its effect on markets and the global economy.
The Israel-Iran conflict enters its fifth day with no sign of de-escalation in sight. In an interview with «ABC News» Israel Prime Minister Benjamin Netanyahu did not rule out plans to assassinate Iran’s Supreme Leader Ayatollah Ali Khamenei as a means to «end the conflict». While President Donald Trump said the US is not involved, he added that participation was «possible».
Will the conflict continue to escalate? How will this impact the global economy, especially given the potential for an Iranian blockage of the Strait of Hormuz where 20 percent of global oil shipments pass through? How will markets react?
Escalation Unlikely
Banks remain confident that meaningful escalation is unlikely and that the conflict will remain contained in the region.
«We’re keeping our current portfolio positioning in place for now. So far, this still looks very much like a controlled confrontation, even if market jitters are showing up as expected in commodity prices, particularly oil. But for the moment at least there’s no sign of an irreversible escalation,» said a note by Lombard Odier chief economist Samy Chaar.
«While the missile barrage and air attacks are intense on both sides, a meaningful escalation seems contained so far. For the time being, we stick to our best guess, that this conflict will follow the usual geopolitics playbook: a sentiment shock rather than a fundamental shock, with prices rising temporarily before returning to previous levels,» remarked Norbert Rücker, Julius Baer’s economics head, in a separate note.
Strait of Hormuz: Block or Not?
Should Iran decide to block the strait to its south, there could be a real effect on oil prices and inflationary pressures, especially if OPEC members like Saudi Arabia also decide not to increase supply. However, banks also believe this is an unlikely scenario.
«The risk of a closure of the Strait of Hormuz, a key choke point of oil trade, seems low. Iran needs the economic lifeline of oil exports, and such a move would alienate key oil buyers or allies on both sides, namely the United States, China and India,» added Rücker, highlighting the bank’s lifting of its three-month oil price target to $72.5 last week to account for a temporary risk premium.
«[W]e would balance near-term oil market worries against the longer-term context of significant over-supply relative to global demand, and significant OPEC+ spare capacity,» said Manpreet Gill, CIO AMEE (Africa, Middle East and Europe) at Standard Chartered, in another note.
History of Geopolitical Impact
For others, history is a reference for optimism as past performance indicates limited market effect from most geopolitical events.
«History shows that the impact of geopolitical events on equity markets tends to be short-lived. During the past 11 major geopolitical events, the S&P 500 was on average just 0.3 percent lower one week after the event and 7.7 percent higher 12 months later,» according to a note by UBS’ chief investment office.
«If the conflict remains contained mostly to Israel and Iran, markets should soon turn their attention back to underlying macroeconomic and policy fundamentals, which we believe remain supportive for equity gains over the next 12 months.»
