Displaying items by tag: Iran
Investors are currently afraid of the turmoil in the Middle East. The US killing of Iran’s military leader has greatly stoked tensions, and markets are worried about a war breaking out in the Middle East. Since there have been many geopolitical issues in the region in recent history, there are a lot of examples of how markets have reacted. Suntrust bank analysts summarize how the market usually reacts, saying “While it is not unusual to see short-term weakness, these geopolitical events tend to have a transitory market impact … For example, when looking at a sample of geopolitical/military events, the S&P 500 was higher 12 months later in nine of the 12 events we reviewed. The three instances where stocks were down a year later coincided with a recession”.
FINSUM: If a full on war does not happen, we expect the effects will be transitory. The other non-military issue that could cause a problem is a big supply shortage in oil.
There have been two huge beneficiaries of the increased tensions with Iran in recent days: oil and gold. The shiny metal is now at its highest level since 2013 at almost $1,600 per ounce. The difference between the two is that gold seems likelier to stay elevated. Goldman Sachs argues oil would actually need a physical disruption to supply in order to stay elevated, while historically gold is likely to keep rising. According to the bank, “In contrast, history shows that under most outcomes gold will probably rally to well beyond current levels”, says Goldman’s head of commodities research.
FINSUM: Gold certainly has a longer runway than oil for staying high as its rise in prices has nothing to do with a possible supply disruption, which means one doesn’t need to materialize in order for prices to keep moving higher.
The chances of a war breaking out with Iran are not minute. They are probably not high, but significant enough that it is worth having a plan. It may be unseemly to think about asset prices during armed conflict, but just because a war has broken out does mean one’s duty to protect clients ends. The key thing to remember is not to panic. Selling into a panic is a bad idea, and historically speaking, the market tends to be higher six months later anyway. Generally speaking, that is the trend in past armed conflicts. There is an initial fall in stocks, only to be followed by a subsequent rise over the next six months to above the starting level.
FINSUM: We do not think a war with Iran will happen. This seems more like simple political wrangling.
President Trump warned yesterday that he hoped the US could avoid a war with Iran. Some of the president’s advisers are more hawkish on Iran that Trump himself. Tensions are rising sharply and Trump is reportedly quite against going to war with the middle eastern state. The White House has been warning about increased threats from Iran, but few details have yet been shred, even with Congress, so for now the specifics are unclear.
FINSUM: Since the details of the threat are not at all known, it is hard to make an opinion on a course of action.
The oil market is nervous, which seems likely to lead to volatility. The surprise is that sharp moves may trend to the upside rather than the downside. The two big concerns are about how sanctions on Iran may crimp output, as well as how OPEC lacks spare capacity to boost output. Such concerns are a stark change from the attitude that accompanied the sharp price falls in recent weeks, when supply seemed to be expanding strongly.
FINSUM: The Saudis are saying they will expand production to a record, but the reality is they do not want to do so because they don’t want prices to fall. It seems like OPEC will walk a line to keep prices where they are.