Tension in the Middle East: The impact of war on stock market
On 13th of June Israel launched the military operation “Rising Lion”, followed by operation “Midnight Hammer” carried out by US armed forces on the 21st of June, aiming at degrading Iran’s military capabilities and nuclear infrastructure.
The latter was believed by both the Israeli and US government to have been diverted from the purpose of nuclear energy generation for civilian uses to developing atomic bombs.
The immediate effect of the attack was to cause the price of oil to surge, with the benchmark Brent crude oil jumping by about 15%, from US$70 to US$81 per barrel.
Gold, acting as a traditional “safe haven” to hedge geopolitical risk rose, as did, briefly, the US dollar, and there was a strong inflow into US government bonds, a relatively safe place where to park money during periods of turmoil, causing their price to rise and yield to fall.
The possibility of Iran retaliating by blocking the Straits of Hormuz, the sealine between Iran and Oman through which one fifth of world oil supply transits in and out of the oil rich Middle East region, was a key risk.
The predictable repercussion of such an act would have been to cause the price of oil to skyrocket with consequent negative knock-on effect on global economic growth and, likely, heavy falls stock markets around the world.
The fact that the Iranian government refrained from taking such a drastic action, coupled with the circumstance that, on its own, Iran produces a relatively modest 4% of global oil supply, and the easing of reciprocal military strikes ending in a truce between Iran and Israel, are all elements that contributed to the price of oil to fall drastically back to the level of the status quo ante bellum.
Investors generally remained calm and largely shrugged off the bombings as contained, one-off events, and equity markets remained stable without suffering any sharp stock market sell-off.
The Iran-Israel truce, mediated by the US government, is currently holding and the situation seems to be stabilising. However, geopolitical tension in the Middle East has been a constant feature of the region for decades, hence a sudden return of volatility cannot be excluded.
Overall, the recent political and military events underscore the importance of investors keeping their nerves and of asset diversification when it comes to investment portfolios.
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Any research is for information purposes only and does not constitute financial advice. The value of investments and any income from them may go down as well as up, so you may get back less than you invested.
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