Investors have started to flock safely as the world awaits Iran’s response
(Bloomberg) – Traders are forecasting a decline in stocks, a crude price surge and possibly a strengthening of the dollar as investors head towards safety following the US attacks on Iran’s three major nuclear sites.
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Concerns that the war will intensify further could lower stock prices, but bonds could be boosted, says Market Watcher. Movements will be greater if Iran responds with steps such as blocking the Strait of Hormuz, blocking key passages for oil and gas cargo, or attacking US troops in the region.
“The first reaction will be safety and flying to stocks,” said Neil Birrell, chief investment officer at MiTon Investors. “The level at which the stock market is standing will definitely face an increased risk, and there is no doubt about that.”
Market response has been curtailed since Israel’s first attack this month. Even after falling for the past two weeks, the S&P 500 has been around 3% below its all-time high since February. Investors expect conflicts to be localized without a major impact on the global economy, according to Evgenia Molotova, senior investment manager at Pictet Asset Management.
“But it all depends on how conflict develops and how things seem to change over time,” she said. “The only way they take it seriously is if the Strait of Hormuz is blocked because it affects access to oil.”
Iran has vowed to impose “eternal consequences” on the bombing, saying it will reserve all options to protect its sovereignty.
Still, the downsides could be limited as some market participants prepare to exacerbate the conflict. MSCI All Country World Indec has pulled back 1.5% since Israel attacked Iran on June 13th. Fund managers reduced their holdings, stocks were no longer over-acquired, and demand for hedging increased.
The biggest market response since the onset of escalation is in oil, with Brent futures increasing 11% per barrel at $77. Traders are preparing for another surge in oil prices, despite it being unclear where the crisis will go from here. The rise is scheduled to resume on Monday after US assaults dramatically raised interests in regions, which make up a third of global oil production.
Oil analysts at Morgan Stanley said a quick resolution could allow the price to return to a barrel of $60, but continued tension could leave oil in its current range. “The fundamental disruption to the global supply of oil will make oil prices much higher from here, as it can collide with cargo throughout the region,” they said.
Meanwhile, the dollar has risen by about 0.9% since the conflict began. It is a relatively small movement given the traditional role of US currency as a heaven in an era of chaos. The US currency has been abused in recent months by Donald Trump’s trade and fiscal policy.
“The biggest deal I have at the moment is the short dollar,” Billel said. “No one likes it. But traditionally it’s a safe currency that people go to, and it might just mean that this is going around the fate of the dollar.”
This response has not been so easy in the US $29 trillion market since the conflict began. Yields initially sank, but the move quickly reversed concerns about a revival of inflation. The US Treasury Department has generally not changed much since June 13th. Since then, the 10-year memo yield has risen to 4.38% on Friday at less than two basis points.
Below are comments from strategists and analysts on how investors will respond on Monday.
In very close conditions, the market may be worried about Iran’s retaliation, whether it blocks the Strait of Hormuz… The crisis in the region shows that the impact on stocks from the oil crisis tends to be short-lived, usually a medium-term purchase opportunity. In fact, if conflicts lead to more stability and peace in the Middle East, they could be considered bullish for risk assets over the medium term.
Diego Fernandez, Chief Investment Officer, A&G Banco, Madrid
“We lose some risk, but not offensive. The world may be a safe place without Iran’s nuclear threat, but we need to see how Iran’s reaction and conflict evolves.”
Trump couldn’t afford to drag this over. If oil is too long, it’s a political headache, especially if it’s heading into the mid-term. High gas prices will hit Main Street, fuel inflation, and voters will be directed at you. So this movement had to be fast, surgical and decisive. Note that the risk premium is impressive in oil containment. Short-term vols are surged but little else has spread elsewhere. If Iran is closed (Strait of Hormuz), they will cut off their main revenue lifelines – effectively speed up their own collapse.
That’s a very worrying situation. Investors will take hours to digest the attack before the market opens on Monday, and much depends on whether Iran responds or not. Anyway, that’s not good.
As central bank policies are far more regulating than the previous oil shock, stocks may only see shallow declines. Furthermore, there is no sense of happiness in the market in terms of flow. It won’t be as it had in 2022 when the S&P 500 and European stocks fell 20%. Our view is that the Fed may actually ignore potential oil shocks. That’s why they still say the S&P 500 could potentially hit a new high this year.
We are definitely in a more risky environment than Friday. The market responds, but perhaps it’s still modest in the stock market. We certainly plan to see oil rise. Investors should also consider the higher oil impact on inflation, in which case Europe will be hit harder than the US. This year there was a lot of uncertainty and now it’s another event added to this. So we see some volatility, but for now, given the information we have, I don’t think it will live a long life. So far, we have not seen bombing energy facilities, and the Strait of Hormuz has not been closed. The market appreciates it. There are certainly risk-off feelings, but hopefully it won’t live long or too deep.
Until now, the war has been very focused on the Middle East, but with the involvement of the US, this seems much more serious in nature, and the risks spread in a truly large way. As for the market, I think there is no doubt that the biggest impact on the commodity market will definitely be seen, and there is a high possibility that energy prices will be even higher. Additionally, these tensions could echo across the stock. The market will be priced with a variety of possibilities for how Iran will escalate. The worst case scenario is that Iran tries to close the Strait of Hormuz. The initial impact is seen in the oil market, and then immediately resonates across stocks and bonds. From an stock market perspective, this is extremely risky.
This marks the turning point of the market. Oil and gold are likely to surge geopolitical risks, but the bigger question is whether US assets can still order safe premiums. Rising fiscal risks, institutional tensions, and unpredictability without policies could accelerate the decline of US exceptionalism. Trump’s decision to bypass Congress could add institutional concerns, put upward pressure on US yields and raise doubts on the reliability premium attached to US assets. Beyond higher oil, gold, and volatility, investors are monitoring potential closures in the Strait of Hormuz or retaliation against US naval assets. These risks could increase the safe appeal of the US dollar, increase in inflation uncertainty amid growing concerns about fiscal control and institutional erosion.
Capital competes for classic shelters, including Japanese government bonds, yen, Swiss francs and gold. Treasury yields will feel downdrafted almost immediately. History shows that when investors dump the dollar, they often skim off the Treasury, indicating that the Federal Reserve expects to tilt to stabilize the ship. The measured statements could continue to stabilize the greenback, but rhetoric suggesting US soil or troop strikes will likely shock the bottom. Dollar-yen can extend the edges up to 144.
You can see that there is a high gap between gold, yen, Swiss franc and perhaps the dollar. Gold may shoot up to $3,400 very quickly, but the key theme is volatility. For example, if Trump decides that the strike is complete, the move may not stick. Trump has a bigger stick compared to Tehran, so his next move is more important to the market, whether it escalates further or returns to the negotiation table.
Stocks expect to respond in a measured way. The market has not been technically overexpanded with many transactions within 3-5% of the 200-day moving average. Unless there is a big surge in oil prices, the stock market is expected to stick to current levels.
There are three scenarios. Dramatic escalation in Middle Eastern tensions: This allows you to see the cycle of revenge as the Strait of Hormuz is blocked. The second is the end of similar hostilities that India and Pakistan ended last month. The third is the continued low-strength bombing on both sides. We expect risk assets to be subject to pressure based on scenarios 1 and 3. Under these scenarios, oil and other goods will also be gathered.
The level of fear in global financial markets depends on the next wave of action and the potential period of this conflict. And it can take days or weeks for the war to be cleared up enough to take a sinister position with a massive conviction. With regard to bonds, the effects of this dispute may be mixed. The Fed will likely have less room to cut interest rates due to rising oil prices, but money leaving the stock market will flood bonds and the Treasury as a safe haven, with high bond prices and potentially lower bond revenues.
Viraj Patel, strategist at Vanda Research
The US strike this weekend is another reason why hedge funds and CTAs rush towards the exit with bearish US dollar bets. I believe one of the biggest pain deals this summer is likely to be a higher crush within the US dollar as the reason it’s shorter USD falls on the roadside. Non-US stocks, especially busy and cyclical European and Asian markets, have the perfect storm brewing. Rising geopolitical risks are another headwind of global growth, along with the ongoing slowdown in cross-border trade driven by Trump’s tariff policies (which certain stock markets appear to ignore). As global investors become more cautious, we believe Europe and EM could potentially slow performance here as the recent influx of “hot money” has been unwinded.
– Support from Sidney Maki, Michael Missica, Srinivasan Shibabaran, Abhishek Vishnoy and Jaehyun Ohm.
