Conflict in the Middle East is escalating once more, but the mood across global financial markets remains upbeat for now due to global interest rate cuts and possibly entry of new oil producers such as US, outside the OPEC and non-OPEC circles, that has lifted some concerns off geopolitics, reported Reuters.
Israel, still battling Hamas in Gaza, bombed Beirut on Thursday as it continued its conflict with Lebanese group Hezbollah days after being attacked by Iran.
Yet MSCI’s world stock index is just 1% off last week’s record highs1, and oil prices, which rose around 5% in the 24 hours after Iran’s missile attack on Israel, have steadied below the anticipated US$75/barrel. Trading Economics’ online real-time market showed the West Texas Intermediate (WTI) traded around the range of US$73.7-73.9/barrel early Friday (Malaysian Local Time).
Certainly, a bigger escalation that disrupts supplies of oil from the Middle East would invoke a bigger reaction, and the fact that stock markets are near record highs could make them vulnerable to sharp falls.
But for now markets are cushioned by the prospect of more monetary easing as in interest rate cuts, as well as by the US’ expanded role in oil production, which has somewhat offset the Middle East’s dominance.
“The growing importance of the US would suggest that risks to energy supply from rising tensions in the Middle East are somewhat mitigated,” said Katharine Neiss, chief European economist at PGIM Fixed Income.
To recap, when Russia invaded Ukraine in 2022, oil prices surged above $100 and gas prices soared.
European energy markets have since reorganised themselves, which was a dramatic example of how an energy price surge can affect global markets and economies.
The situation today is different. Central banks are already in easing mode and hopeful the US will avoid recession. The current backdrop of easier monetary policy supports investor sentiment, even as tensions in the Middle East rise.
The world economy is not primed for an oil shock, said Trevor Greetham, Royal London Asset Management head of multi asset, because it is at a “softer stage of the cycle.”
That contrasts with 2022, “when Ukraine happened, you were already in that period where you were just starting to get very high inflation numbers,” Greetham said.
The Bank of England warned on Wednesday that global asset prices remain stretched and are vulnerable to a big fall as investors grow more concerned about geopolitical risks.
“It’s a little bit alarming to me how desensitised markets are to geopolitical risks,” said Andrew Bresler, CEO at Saxo UK, adding that assets are mispriced given geopolitical risks, adding that volatility indicators such as the VIX should be higher.
Meanwhile, investors have jumped on announcement of the long-awaited economic stimulus measures from China that have sent Chinese shares surging, and boosted global assets from luxury stocks to industrial metals and miners.
“The impact of China delivering a big policy stimulus last week was almost a more significant factor (than geopolitical conflict) in terms of what it means for global demand and growth,” said BlueBay’s Dowding.
- MISC is a global service provider of stock data and analytics for investment. ↩︎
