Impact on markets and the economy
Sunday marks 100 days since the war in the Middle East began, and the conflict continues to cause significant volatility in all asset classes in every region of the world as a lasting peace agreement remains elusive.
Negotiations between the United States and Iran have stalled as Washington and Tehran send mixed messages about the status of peace talks and both sides periodically launch military strikes. However, a fragile ceasefire remains in place, allowing diplomacy to take place.
As the conflict drags on, pressure on certain economies and parts of financial markets continues to increase.
Wall Street bulls shrug off the war
Immediately after the first attacks by the USA and Israel against Iran, stocks around the world fell sold. While shares traded on some markets struggled to regain momentum, Wall Street’s major averages pared initial losses as investors looked at the war, higher oil prices and the conflict’s impact on inflation. S&P 500 reached all-time highs even as the war continued.
Iain Barnes, Netwealth’s chief investment officer, said stock markets were dominated by the assumption that war would drag major energy-importing economies from a “benign inflation-free environment” into a stagflationary environment. But optimism about the future disruptive power of artificial intelligence and a profitable landscape for U.S. companies has also come into focus.
“This has seen the strength of equity markets higher but clearly led by companies seen as direct beneficiaries of AI spending in the US and Asian markets,” he said in an email. “European stocks are weaker as the impact of rising energy costs is more problematic.”
“Spending on AI infrastructure has identified a number of potential bottlenecks, particularly the insatiable demand for computing capacity that is driving share prices of semiconductor stocks,” Toni Meadows, chief investment officer at BRI Wealth Management, told CNBC in an email.
“Markets and entire economies like South Korea and Taiwan are therefore receiving growth improvements.”
He added that since the United States is largely self-sufficient in oil, the strain of the conflict in the Gulf is not as urgent for the world’s largest economy.
“Inflation is likely to rise if the Strait of Hormuz remains closed, but investors seem willing to believe that neither Trump nor the Iranians want to prolong this conflict,” Meadows added. “However, the impact of the conflict, unless resolved at some point, will lead to demand destruction that investors cannot ignore. But that point has not yet been reached, and although markets are dominated by a small number of stocks, the positive news flow for these companies outweighs the uncertainty for other sectors such as consumer stocks.”
Bond yields on the rise
Government bonds have been volatile since the start of the war, but yields on government debt remain high.
Bond yields and prices move in opposite directions, so higher yields mean there is continued downward pressure on the value of assets.
Yields on U.S. Treasury bonds are among those rising in the post-war period as investors race to price in higher inflation and hawkish monetary policy. Last month’s return 30 years of Treasury It reached its highest level since before the Financial Crisis.
Many major economies encountered a similar picture.
England, which was also affected by internal political turmoil, saw its government bonds. gilts – sell especially aggressively.
Neil Birrell, chief investment officer at Premier Miton Investors, told CNBC that he takes the view that bond markets are “a real thing to worry about,” citing concerns about high inflation, low growth and supply chain disruptions.
“The longevity of higher inflation and interest rates is likely more important than the absolute peaks they reach, so when the current situation looks set to last, economic growth will suffer and bond yields will likely remain high, making it harder for stocks to maintain their levels,” he said.
Oil prices have fallen but concerns remain
The Strait of Hormuz, a critical oil shipping route in the Middle East, was essentially closed for the duration of the war, causing huge fluctuations in oil prices as traders reacted to headlines about missile attacks, peace talks and ceasefires.
Although prices have fallen significantly from their wartime highs, they remain much higher than where they traded before the conflict began. Global benchmark Brent crude oil futures While trading approximately 36% above pre-war prices, the U.S. West Texas Intermediate Futures still up almost 50%.
The blockade of the Strait of Hormuz has created severe supply constraints, as well as the damage and closure of major energy production facilities in the Middle East.
Supply problems have forced oil importers to look for alternative suppliers. The last 100 days have seen an increase in US crude exports; This is one of the “apparent mitigating factors preventing a significant price increase” in crude oil markets, said PVM Oil Associates analyst Tamas Varga.
“These include the release of the Strategic Petroleum Reserve, sanctions exemptions for Iranian and Russian hydrocarbons, reducing China’s oil imports, alternative routes for transporting oil from the Persian Gulf to Asia and Europe, increasing US exports of crude oil and refined products, and finally destroying demand,” he said.
However, he added that if oil stocks continue to be depleted throughout June, stocks will reach critical operational levels and the race to secure supply will intensify. If that happens, “a move back above $100 will happen soon,” he said.
“It is imperative that the Bosphorus be reopened as soon as possible to alleviate supply shortages and thus inflationary pressure,” Varga said. he added.
Inflation is on the rise
Economic data began to show that the war was having a broader impact beyond financial markets.
As the ongoing war keeps energy costs high, inflation indicators in various major economies have begun to show prices rising due to rising costs of oil, gas, jet fuel, and gasoline.
Consumer price index in the USA In April, the annual rate hit an almost three-year high of 3.8%.
Reduced energy supplies from the Middle East have been a major reason for the rise in inflation; but rising prices have led to government interventions in some countries, including Germany and India.
Paul Surguy, chief executive of Kingswood Group, questioned whether markets were “collectively numb to global war”.
“While there may not be a return to TACO trading, are we seeing a general apathy towards the White House’s constant policy changes?” he said.
“For the former, I hope for the sake of humanity that it won’t. Second, we’ve seen this game before – major market moves early in the trade debate were heartbreaking, as changes to tariffs may not even register on tape as time goes on.”
“What we can see is that support for the war in the United States is at all-time lows, military funding is at all-time highs, and both sides are undoubtedly looking for a face-saving exit. This will likely affect long-term oil prices rather than the current situation. Nobody wants to be here in six months.”
— CNBC’s Bryn Bache, Emilia Hardie and Emma Graham contributed to this report.
