Markets in retreat as Middle East risks mount
Oil up, defense stocks up, stocks down.
Financial markets are on pins and needles after multiple news outlets reported that Iran is planning a missile strike on Israel.
This comes on the heels of Israel’s dismantling of Hezbollah’s leadership in recent weeks and invading Lebanon to further strike at the Iranian proxy group.
🚨🚨🚨Senior White House Official tells me: “The United States has indications that Iran is preparing to imminently launch a ballistic missile attack against Israel"
— Barak Ravid (@BarakRavid) October 1, 2024
What’s happening:
Stocks are down, with both small caps and tech stocks underperforming.
Defense stocks – as proxied by the iShares US Aerospace & Defense ETF – are one of the few groups that is up, outperforming the S&P 500 by about 1.5% in early trading.
Oil jumped a couple bucks, with front-month West Texas Intermediate futures up in excess of 3% shortly after 10:00am ET. Israel is not anything resembling a major oil producer. But the thinking here is that any response by Israel could impair Iranian productive capacity and/or cause Western nations to enhance sanctions on the Gulf nation or enforce existing sanctions more stringently.
Commodity prices are the main channel through which geopolitical strife can have economic and financial market ramifications that stretch far beyond the combat zone. Russia’s invasion of Ukraine accentuating inflationary pressures via feared loss of oil output and a real loss of natural gas – at a time when supply chains were already stressed and demand was solid – is the most recent obvious example to point to.
Often, fading knee-jerk reactions to geopolitical news can be profitable in financial markets – if all the events that doomsayers said would have led to World War III actually did, there’d be more of those than James Bond flicks by now.
However, even at times when there appears to be a limited economic impact, geopolitical flare-ups can still be an excuse for profit-taking – particularly when stocks are richly valued. And in the here and now, this may change the political calculus in the US ahead of next month’s election, with foreign policy potentially assuming more prominence as voters head to the polls.
Gold got a bump on the news, up about 1% on the session.
The US dollar is up against major currencies, with a much more pronounced bout of weakness for the Israeli shekel as these reports surfaced.
