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It was a tough week in the markets, even for investors who grew accustomed to the frequent whiplash under US President Donald Trump’s second administration. Nevertheless, the potential scale of the conflict’s economic impact, beyond the tragedies of death and destruction resulting from Israel’s war against Iran, and Tehran’s reckless retaliation, raises the question of whether markets are even remotely responding enough.
In many past geopolitical crises, oil price shocks have been the harbinger of widespread global economic damage. Brent, the international oil benchmark, broke above $90 a barrel on Friday, up from around $70 before the war started last weekend. In Europe, natural gas prices have almost doubled, and energy prices are fluctuating wildly as new expensive gas is replaced in the energy mix with cheaper renewable energy sources.
Stocks have taken a hit, and bond markets, where yields have risen, are signaling inflation fears. And yet: stock prices in the most advanced markets remain not far from their levels at the beginning of the year. Traditional safe-haven assets, from Swiss francs to gold, do not signal a sudden wave of fear. Why the peace? Geopolitical analysts can warn investors against complacency. So far, the warnings have been largely dismissed.
Those ringing alarm bells may still be right. The conflict in the Middle East is already spreading more than most thought. The longer this goes on, the greater the disruption to vital global supply chains. Trump’s ambition for regime change in Iran could point to a long-term disruption in the fossil fuel-rich region, rather than the few weeks many are anticipating.
One explanation for the calm could be that investors have been numbed or numbed by what would once have been extraordinary events. They may also have internalized Taco’s expectations – Trump always backs out (when the markets sink) – to the extent that ‘the markets are doing well’ has become a self-fulfilling prophecy. But at this point it is not at all clear how Trump can put the war genie back in the bottle if the market reaction becomes too negative.
The oil price channel from conflict to economic unrest is also no longer what it used to be. The US shale revolution means there is more supply to keep global prices in check. And advanced economies are much less oil intensive than during the oil shocks of the 1970s.
Market reactions may also reflect that while the US is causing chaos elsewhere, things could be going well in its own economic heartland. Because of shale oil, rising oil prices are now a positive trade shock for the US. Natural gas is also widely available domestically for North American customers, in contrast to Asian customers who are more dependent on transport through the Strait of Hormuz. With US financial markets still dominating global money flows, the isolation of the domestic economy could support global markets.
What could break this trust? First, a protracted and increasingly intense conflict in the Middle East. Then a more serious economic impact at home. On Friday, in another sign of a weakening labor market, we learned that the US economy lost 92,000 jobs in February. And while America may be a net exporter of energy, the global oil price still feeds into the gas pump. This complicates matters for the US Federal Reserve. Finally, the AI ​​optimism that has underpinned the strength of the US stock market continues to look shaky.
With uncertainty increasing, caution would be a wise move for investors. Some may be tempted to buy the dip. But the conflict and its economic consequences are still playing out.
