Global shares had already had what AMP chief economist Shane Oliver termed a “messy week” when the Australian market opened on Friday morning, but a rapid escalation of Middle East conflicts created even greater volatility.
A little after 10am AEST on Friday morning, reports emerged that Israel had launched strikes on Iran, including capital city Tehran, with Defence Minister Israel Katz quickly confirming that the “pre-emptive” attack had targeted Iranian nuclear sites.
It came just hours after US President Donald Trump signalled that strikes could be imminent, and marked a major turning point to the nations’ efforts to curb Iran’s uranium enrichment programs.
Unsurprisingly, markets reacted swiftly as news trickled out over the extent of the strikes and fears of Iranian retaliation grew.
Tariff news and stronger-than-forecast inflation data in the US had seen the S&P 500 up slightly. However, Oliver noted that a “slump in US futures” following the Israeli attacks points to the US and other major global shares finishing the week down.
“Despite falling on Friday after Israel’s attack, Australian shares bucked the global trend and are on track for a gain of around 0.3 per cent for [the] week after having hit a record-high mid-week with the gains led by energy, utility property and consumer stocks,” the chief economist said.
“Bond yields fell on the back of lower US inflation and safe haven buying after the flare-up in the Middle East.”
Also coming as little shock was the surge in oil prices, which jumped around 16 per cent as investors priced in the possibility of Iranian retaliation causing supply disruptions.
“Oil prices were already rising this month on signs of increasing risks and have spiked further – with the rise so far this month threatening a flow on of around 12 cents a litre for Australian petrol prices if sustained at these levels,” Oliver said.
What happens in the “very near term”, he added, will depend on exactly how Iran retaliates – though a response of some kind is all but assured.
“[Iran] will almost certainly fire missiles back at Israel, but the main risk would be if it attacks US bases in the region (which is possible but likely to be limited), neighbouring oil producers (which is unlikely) and disrupts/blocks the Strait of Hormuz, through which roughly 20 per cent of global oil consumption and 25 per cent of global LNG trade flows daily (which is possible),” the economist said.
“It is the latter which poses the biggest upside risk to oil prices, but central banks, including the RBA, will likely look through any near-term boost to inflation from higher petrol prices.”
Oil prices are currently sitting at a level roughly equivalent to where they were a year ago, with Oliver noting that any longer-term impacts would be dependent on whether Iran returns to the nuclear talks with the US.
“It’s possible that Israel by its attacks (and the US behind it) is trying to force Iran to do this by sending a warning that if it doesn’t comply, it faces an even worse attack from the US,” he said.
“So, maximum pressure is back. But for shares it likely means a renewed period of uncertainty given the risk of even higher oil prices in the near term.”
Looking beyond oil prices, gold also saw a safe-haven bump, while copper and iron ore prices fell. Bitcoin also fell after a brief period back above US$110,000, with the Australian dollar and US dollar both also dipping.
However, Oliver warned investors against getting “too negative” in response to the Israeli strikes.
“Just bear in mind that tensions regularly flare up in the Middle East, escalate for a while and then settle back down again, so there is a danger in getting too negative on it and the key for investors is to look for the opportunities that the latest conflict may throw up,” he said.
