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Israel-Iran escalation rattles markets: Oil and gold rise, share markets, bitcoin fall

By Maja Garaca Djurdjevic
4 minute read

The potential escalation in the Middle East and its impact on global oil supplies and stability has rattled markets.

On Friday, US officials confirmed initial reports from the US-based ABC network indicating that Israel carried out a military operation on Iran, despite Iran’s attempts to downplay the attack.

Immediately following media reports of explosions near the Iranian city of Isfahan, oil prices surged by over 3 per cent and the price of gold reached a near-record high of over $3,700 per ounce. The news also prompted a decline in the Australian share market, with the S&P/ASX 200 trading at $7,494.60 just after 12pm on Friday, down from $7,642.10 at opening.

The Australian dollar was also sent on a downward trajectory, sitting at just below US64 cents at 1pm on Friday.

Speaking to InvestorDaily, AMP’s Shane Oliver said global and Australian shares had already been declining over the past week due to rising concerns about an escalation in the Middle East conflict and heightened expectations for longer interest rates following comments from the Fed, which dampened investor confidence.

“Reflecting the poor global lead, Australian shares fell around 3.2 per cent for the week with broad-based declines led by health, consumer, and property and IT shares,” Oliver said.

“Bond yields initially rose on the back of expectations for rate cuts being further pushed out but then rallied on safe haven demand to end little changed for the week.

“Oil prices were little changed with rising US stockpiles pushing them down before a rebound on Middle East escalation fears later in the week pushed them back up.

“Metal and copper prices also pushed higher, not confirming the negative growth message from falling share markets. Iron ore prices also continued to recover from their recent fall.”

While the price of gold surged through US$2,400 per ounce (AU$3,700) on safe haven demand, bitcoin plunged on Friday to below $100,000, suggesting it’s not always a great substitute for gold, Oliver said.

“Bitcoin is acting more like a high beta version of shares at present,” he said.

Elaborating on the performance of share markets, AMP’s chief economist said: “The huge gains in share markets since their October lows left them technically overbought with stretched valuations and high levels of investor optimism which left them vulnerable to a bout of volatility or a correction which now appears to be unfolding, with concerns around US inflation and interest rates and fears of an escalation in the war in the Middle East threatening global oil supplies providing the trigger.”

In terms of the latter, Oliver said Iran produces about 3 per cent of global oil supplies and about 20 per cent of global oil flows through the Strait of Hormuz, both of which could be threatened by a war involving Iran.

“From their recent high, global and Australian shares have fallen by around 5 per cent and the short-term risks remain tilted towards further falls,” he said.

“However, we continue to see further gains in shares this year as inflation slows, central banks still cut interest rates and recession is avoided or proves mild. As such, we see current market moves as a correction rather than something deeper. But it’s still way too early to say whether it’s over or not.”

Oliver reminded it’s still early days regarding the Iran-Israel situation.

“Iran’s retaliatory attack on Israel was well flagged, measured and there was minimal damage and looks designed not to provoke a bigger Israeli retaliation,” he said.

“Unconfirmed reports of Israel undertaking a counter-retaliation run the risk of a further escalation depending on how severe their strikes are, so clearly, this has a way to go in determining what the impact on oil supplies will be and hence how much further share markets might fall.”

Bitcoin traders ‘sometimes exaggerate’ reaction

Reacting to the news of bitcoin’s drop, Caroline Bowler, chief executive officer of BTC Markets, said geopolitical tensions entail a shift towards traditional safe-haven assets such as the US dollar, gold, and government bonds.

“Cryptocurrencies, including bitcoin, are commonly viewed as risk-on investments in comparison to these established safe havens. Therefore, during periods of heightened geopolitical uncertainty, cryptocurrencies may experience selling pressure as investors seek refuge in more stable assets,” Bowler said.

“Additionally, geopolitical news events can trigger rapid and sometimes exaggerated reactions among traders, contributing to short-term price volatility in the crypto market.”

Highlighting recent academic studies that indicate bitcoin serves as a short-term hedge against the US dollar, Bowler said, “it is too early to predict the impact on the US Dollar Index (DXY), but the United States’ role in Israel and the Middle East is complex and hard for investors to ignore”.

“Perspectives among crypto investors regarding bitcoin are diverse. While an extended conflict may play as a macro theme, cryptocurrencies have demonstrated a tendency to follow their own path,” she said.

“Historical precedent suggests that this autonomy will likely play out in the longer term, with cryptocurrencies maintaining their unique trajectory amidst the prevailing uncertainty.”