By Lucy Raitano and Dhara Ranasinghe
LONDON (Reuters) – Reports of an Israeli attack on Iranian soil that could drag the Middle East into deeper conflict have rattled global markets as they face geopolitical risks that could quickly change direction everything from oil to bonds, and renewing inflation risks.
Stocks fell Friday, oil briefly jumped more than $3 a barrel and safe-haven government bonds rebounded.
The moves have been relatively modest, but the increased tensions are injecting new uncertainty and fueling fears that high oil prices and potential supply disruptions will keep inflation high.
“Even if these measures appear more benign and telegraphed between Iran and Israel, and the base case is not one of a broader conflict, more risk premiums will likely need to be incorporated,” Graf said. , director of macro strategy for Europe at State Street Global Markets.
Here’s a look at the key takeaways for the markets.
1/ OH OIL
Oil prices have risen about 13% since the start of the year, to nearly $90 a barrel, and are expected to remain high.
The International Monetary Fund on Tuesday described an “adverse scenario” in which an escalation in the Middle East would lead to a 15% rise in oil prices and higher transportation costs that would cause global inflation to rise to around 0 .7 percentage points.
Tight oil supplies and rising prices have been supported by production cuts from oil producer group OPEC and other major oil producers.
Morgan Stanley raised its forecast for Brent crude oil for the third quarter to $94.
“A geopolitical risk premium appears to have been priced into the oil price, but it is clear that further escalation presents new upside risks,” said Thomas McGarrity, head of equities at RBC Wealth Management.
2/ SECOND ROUND OF INFLATION
Frightened by the latest US inflation figures, investors are watching oil. It was the surge in energy prices two years ago that helped drive up inflation and rates.
High oil prices threaten falling inflation and could prompt a further reassessment of bets on lower global rates.
The euro zone’s key market gauge of long-term inflation expectations, which typically tracks oil, rose to its highest level since December at 2.39% on Tuesday. It remains above the 2% inflation target set by the European Central Bank.
The ECB said it was “very attentive” to the impact of oil, which can harm economic growth and stimulate inflation.
3/ GO TO ENERGY STORES
Energy stocks benefit from rising oil prices.
The S&P 500 oil index and European oil and gas stocks hit record highs earlier in April before retreating.
U.S. oil stocks have surged nearly 12% since the start of the year, outperforming the broader S&P 500’s 5% gain.
Yardeni Research recommends an “overweight” position on energy stocks, considering a rise in Brent crude to $100 in the coming weeks as a possibility.
Oil briefly hit around $139 after Russia’s invasion of Ukraine in 2022, its highest level since 2008.
“Rising oil prices are complicating central banks’ efforts to bring inflation back to targeted levels,” said RBC’s McGarrity. “Exposure to the energy sector arguably provides the best hedge against inflation and geopolitical risks in short-term equity portfolios.”
4/ RUSH FOR A SAFE GOODBYE
The demand for safe havens such as American or German bonds – especially before the weekend – outweighs the desire to sell bonds given for the moment new inflation risks linked to the rise in oil .
U.S. 10-year Treasury yields fell 15 basis points on Friday and were last down 6.5 basis points at 4.58%, down from recent five-month highs.
“This suggests that markets are more concerned about the need for safe havens than the immediate inflationary implications of rising energy prices,” said Philip Shaw, chief economist at Investec.
The dollar and Swiss franc also benefited from safe-haven demand, with geopolitics and high oil prices adding to a dollar rally fueled by a reduction in bets on a U.S. rate cut.
The strong dollar is exacerbating pressure on economies such as Japan, which is struggling with a 34-year low yen, with traders nervous about possible central bank intervention.
ING currency analyst Francesco Pesole said further escalation in the Middle East could lead to losses for the currencies of New Zealand, Australia, Sweden and Norway as the feeling of risk would suffer; the Swiss franc could still rebound.
5/ FRESH EM PAIN
Rising oil prices and a stronger dollar are also hurting emerging markets, such as India and Turkey, which are net oil importers.
The Indian rupee hit a record low this week.
Even for Nigeria and Angola, which are typically Africa’s largest oil exporters, weakening local currencies and rising fuel prices have hit government coffers due to capping oil prices. gasoline at the pump and the lack of local oil refining.
“A return to above $100 in oil prices could convince the Fed to throw in the towel on hopes for monetary easing for now, and a potentially amplified impact of geopolitical risk on emerging currencies would fuel a substantial rotation towards the dollar,” Pesole said. .
(Reporting by Lucy Raitano and Dhara Ranasinghe; additional reporting by Libby George and Harry Roberston; graphics by Kripa Jayaram, Prinz Magtulis, Vineet Sachdev, Riddhima Talwan; editing by Chizu Nomiyama)
