On Tuesday, AMP’s Shane Oliver told InvestorDaily that while Israel’s invasion of Lebanon marked a significant and worrying escalation in conflict, and a major humanitarian concern, the impact on financial markets was expected to remain relatively muted – unless Iran became directly involved.
Overnight Iran launched ballistic missiles at several military and security targets in Israel, prompting another alarming exchange of threats between the two states. Namely, on Wednesday, Israel vowed to launch a “painful” response, supported by its biggest ally the United States, while Tehran warned it would initiate “vast destruction” in response to any retaliation.
Rising tension in the Middle East saw investors, who remained mostly calm on Tuesday (AEST), grow more cautious overnight, prompting a move towards safe haven assets.
US bond yields fell, oil, gold and the US dollar all saw gains, while US share markets slumped and European equities ended mixed.
The S&P/ASX 200 Index edged slightly lower on Tuesday, affected by underperformance in key stocks, yet it remained close to its yearly peak after posting its strongest September quarter in over a decade.
The ASX 200 finished down some 0.15 per cent on Wednesday.
Speaking to InvestorDaily in light of a rapidly changed situation over 24 hours prior, Oliver said: “The risk has clearly gone up another big notch.”
According to Oliver, so much will now depend on Israel’s response.
“If its proportional and mainly focused on Iranian military facilities then the oil price and shares will quickly settle down again,” he said.
“If alternatively, Israel escalates another notch with an attack on Iranian nuclear or oil facilities then we could be in for a much rougher ride in share markets as Iran would likely then retaliate again leading to a further escalation and disruption to oil supplies.”
GSFM investment strategist, Stephen Miller, agreed that an escalation would be “unambiguously bad for the global economy” and would “circumscribe the ability of central banks around the world to cut rates”.
Miller expects investors to continue their rush to safe haven assets, including gold and the Swiss Franc.
“Riskier assets like equities will generally wobble, particularly if one accepts that valuations in equity markets are getting close to being pretty fully valued. The issue with equity markets now is that they are not priced for an accident,” he explained.
The best-case scenario is that the situation will resolve itself like it did in April, when tensions between Israel and Iran calmed without a major escalation, both professionals agreed.
Spot gold stood at US$2,657.22 at 10:55am AEST, up from US$2,639.92 on Tuesday afternoon, but settled at some $US2,653.01 by the afternoon.
Brent crude oil futures moved to US$74.61 per barrel on Wednesday morning, up from US$71.8 a day earlier, and continued to rise to US$74.79 by 4pm AEST.
On Tuesday, Oliver expected that the higher risk premium from escalating Middle East tensions would be balanced by expectations of increased supply.
Namely, according to the chief economist, oil prices could be cushioned by an anticipated supply boost, with Saudi Arabia set to ramp up production in December and Libya, accounting for 1 per cent of global output, resuming its operations. Additionally, rising production in non-OPEC nations and cooling global demand are further expected to ease pressure on oil.
