By Dhara Ranasinghe and Alun John
LONDON (Reuters) – Conflict in the Middle East is escalating once again, but the mood in financial markets remains subdued for now due to changes in oil production and global interest rates that are reducing geography.
Israel, which is still fighting Hamas in Gaza, bombed Beirut on Thursday as it continued its conflict with the Lebanese Hezbollah group days after it was attacked by Iran.
Yet MSCI’s world stock index is off just 1% from last week’s record high and oil prices, which rose nearly 5% in the 24 hours after Iran’s missile attack on Israel, are standing close to threatening 75 dollars per barrel.
In fact, a larger increase that disrupts oil supplies from the Middle East and shakes the world economy could trigger even greater sentiment, and the fact that stock markets are near record highs could put them at risk of a sharp fall.
But for now markets are buoyed by the prospect of further monetary easing and the expanding role of the US in oil production, which has weakened its dominance in the Middle East.
Wall Street’s so-called fear gauge, the VIX volatility index, is averaging around 20 – well below a post-crisis peak of more than 60 during the market turmoil in early August associated with a lull in global trade.
“When we think about geographic risk and its presentation in asset prices, what will have the biggest impact is if we see results that will affect growth or inflation,” said Mark Dowding, chief investment officer of BlueBay Asset Management.
“The biggest concern has actually been through the impact of shipping on oil prices. But even here, we’ve been in a situation where, if anything, oil prices have been going down.”
The United States becoming a major oil producer – the world’s largest for the past six years – has reduced international attention to Middle East supply disruptions, analysts say.
And European energy markets have reorganized since Russia’s invasion of Ukraine, which was a good example of how rising energy prices can affect markets and the global economy.
“The growing importance of the United States would suggest that energy supply risks from rising tensions in the Middle East have been somewhat mitigated,” said Katharine Neiss, chief European economist at PGIM Fixed Income.
DIFFERENT TIMES
In 2022, when Russia invaded Ukraine, oil prices rose above $100 and gas prices rose, triggering a new wave of inflation that increased pressure on central banks to raise interest rates, leading to higher yields, especially in America and, in turn, increase. dollars.
The situation today is different. The central banks are already in an enabling mode and we hope that America will avoid recession.
The world economy has not been brought to the oil shock, said Trevor Greetham, Head of Royal London Asset Management of many assets, because it is in the “softest phase of the cycle.”
That contrasts with 2022, “when Ukraine happened, you were already in that period where you were starting to get a lot of inflation,” Greetham said.
The current state of easy monetary policy is supporting investor sentiment, even as tensions in the Middle East escalate.
Tilmann Kolb, market strategist at UBS Global Wealth Management, said that while the past two years have seen major developments in domestic and international politics, for markets, the economic outlook remained important.
“Where is inflation going? How is the Fed responding? Is growth holding up?,” he said.
Meanwhile, investors have jumped on announcements of long-awaited economic stimulus measures from China that have sent Chinese stocks soaring, boosting global assets from luxury stocks to industrial metals and miners.
“The impact of China providing a big policy stimulus last week was almost the most important factor in terms of global demand and growth,” said BlueBay’s Dowding.
RISK ON RISK
Of course, the dial can swing very quickly and the oil itself remains a means of transmission as geography and politics burn more.
Tina Fordham, founder and geostrategist at Fordham Global Foresight, said she was watching to see if Israel would target Iran’s energy infrastructure or nuclear facility.
“Any of those goals can cause a market impact,” he said.
“Where this could get more problematic is, for example, if Ukraine targets Russian energy infrastructure at the same time.”
And with stock markets nearing record highs, there’s scope for a sharp downside, policymakers warn.
The Bank of England said on Wednesday that global asset prices remain tight and are at risk of a sharp fall as investors grow more concerned about geopolitical risks.
And for Andrew Bresler, CEO of Saxo UK, assets are not being priced out of geopolitical risks, adding that volatility indicators such as the VIX should be higher.
“It’s a little scary to me how insensitive the markets are to geographic risks,” he said.
(Reporting by Dhara Ranasinghe and Alun John, additional reporting by Naomi Rovnick; photos by Amanda Cooper Editing by Susan Fenton)
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