Volatility in global share markets appears to be resurfacing following the latest warning from the US about an imminent retaliation from Iran that could involve multiple attacks on Israel as soon as this week.
Speaking at a press briefing on Monday, 12 August, White House national security spokesperson John Kirby confirmed the US is monitoring the situation in the region “very, very closely”.
“It is difficult to ascertain at this particular time, if there is an attack by Iran and/or its proxies, what that could look like. But we have to be prepared for what could be a significant set of attacks,” he told reporters.
In conversation with InvestorDaily, GSFM investment strategist Stephen Miller noted markets have been “on edge” ever since the Iranian Revolutionary Guards issued a statement on 3 August vowing to avenge the assassination of Hamas leader Ismail Haniyeh.
Miller warned that if these tensions persist or escalate, they would not only affect oil prices, but they could exasperate US recession fears, complicate the Reserve Bank of Australia’s efforts to control inflation, and ensure a higher for longer rate scenario.
“If we see an attack this week, it’s likely oil prices will respond, but it will depend on how any conflict evolves, the durability of that response, and its knock-on effects through financial assets prices, markets, and so on,” he explained.
Oil prices surged more than 3 per cent on Monday, August 12, following several days of growth. However, by Tuesday, the rally ended, with global benchmark Brent crude futures falling approximately 0.95 per cent to US$81.52 a barrel.
“I know oil prices don’t feed directly into the core CPI, but they do via the second round of things, so that’s the major worry with what’s happening in the Middle East,” Miller observed.
He expects this volatility to continue until the nature of the potential Iran-Israel conflict becomes apparent.
The investment strategist also acknowledged market concerns about the possibility of US involvement, telling InvestorDaily the US “was never going to sit idly by”.
“Whether the US takes a more active role in the Middle East in the event of a conflict, I’m not sure whether that in and of itself will heighten recession fears, I suspect that it complicates the outlook for oil and oil prices, and that’s the primary cause for heightened recession [fears],” Miller said.
Citing the 1973 oil crisis and the 1979 energy crisis, Miller noted that while the potential conflict may not reach the same scale, he warned that if it persists, “it’s not out of the realm of possibility that it could be long-lasting”.
“And if it’s long-lasting, it’s going to mean that bouts of volatility within financial markets are going to be more persistent, if episodic,” he said.
Jun Bei Liu, lead portfolio manager at Tribeca Investment Partners, agreed that the US becoming involved would escalate concern.
“The US economy is already slowing down, and then if you go to start deploying troops, then everyone will be worried about the economy, financial costs, then it becomes a very different conversation,” she said.
“Then it’s ‘is recession real?’ and ‘does the Fed need to cut more?’”
However, if the world’s largest economy, alongside its peers, manages to avoid involvement, Liu suggested the impact might not be as widespread.
“We’ve seen it again and again across many different conflicts, it just doesn’t last very long,” she told InvestorDaily.
“[The tensions] will initially impact confidence and you’ll have a couple of days of sell-off, but it’s not going to be long-lasting.”
She, too, noted that oil could come to the forefront as investors begin a potential flight to “safe harbour” assets.
“Oil equities are already being talked about – there just seems to be a lot of demand now, wanting to buy oil,” she said.
Gold is also likely to see a “flight to quality”, Liu explained, with investors wanting to “be defensive in a world where there’s geopolitical conflict”.
“Gold usually has a good run, but oil is most directly impacted,” she added.
Liu predicted that defence companies will also attract investor interest, expecting a short-term boost in sentiment.
