The one thing that gets the market freaked out about wars isn’t happening

Stocks are shrugging off a short-lived slump following Israeli attacks against Iran and ensuing retaliatory strikes last week because the one thing that gets markets to care about geopolitical strife is evaporating.

Deutsche Bank strategist Henry Allen looked at three times when geopolitics had a pronounced impact on markets — the 1970s, Iraq’s invasion of Kuwait, and Russia’s war against Ukraine in 2022 — and said they all had one thing in common: a pronounced, relatively persistent spike in oil prices that had negative economic ripple effects extending far beyond the theaters of conflict.

That isn’t happening so far. While oil prices surged after the attack, there’s no follow-through to speak of among reports that Iran is looking to de-escalate, even as the two sides continue to exchange attacks.

At their lows of the morning, West Texas Intermediate futures had basically gotten back to levels seen before the initial reports of Israeli strikes against Iran.

“Today, however, even if the geopolitical events are hugely significant from a political standpoint, from an economic standpoint we’re not seeing a reassessment of the wider growth outlook outside the Middle East,” Allen wrote. “That means the broader market impact will be more limited as well.”

“While WTI 6M skew [note: the relative price of call options versus puts] also flattened, puts are still trading at a premium to calls, indicating investors still see more downside risk to oil over the next 6 months, as slowing growth and Trump’s trade war continue to weigh on oil demand,” Mandy Xu, Cboe’s head of derivatives market intelligence, wrote. “This also explains the fairly muted move in inflation expectations. US 5-year breakeven inflation rose marginally last Friday (+2.5bps to 2.32%) vs. surging over 90bps to a high of 3.7% in March 2022.”