Sunday marks 100 days since the Middle East war began, and while a durable peace deal remains elusive, the conflict continues to cause significant volatility across all asset classes in every region of the world.
Negotiations between the United States and Iran have stalled, with the U.S. and Iranian governments sending mixed messages about the status of peace talks and both sides regularly carrying out military attacks. Despite this, a fragile ceasefire remains in place to conduct diplomacy.
As the conflict drags on, pressure on certain parts of the economy and financial markets continues to mount.
Wall Street bulls ignore war
Immediately after the first attack on Iran by the US and Israel, stocks around the world were sold off. While some market-listed stocks are struggling to regain momentum, Wall Street’s major averages are wiping out early losses as investors focus on the impact of wars, high oil prices and conflict on inflation. of S&P500 Despite the ongoing war, prices reached a new all-time high.
Ian Burns, chief investment officer at NetWealth, said the stock market was dominated by the belief that the war would jolt major energy importers from a “benign disinflationary environment” to a stagflationary environment. But optimism about the future disruptive power of AI and its profitability for U.S. companies has also been noted.
“This has led to higher stock market prices, but the clear leaders are companies in the US and Asian markets that appear to be the direct beneficiaries of AI spending,” he said in an email. “European stocks are further depressed as the impact of rising energy costs becomes more of a problem.”
“Spending on AI infrastructure has exposed a number of potential bottlenecks, particularly the insatiable demand for computing power that is driving up semiconductor stock prices,” Toni Meadows, head of investments at BRI Wealth Management, told CNBC in an email.
“Because of that, markets and entire economies like South Korea and Taiwan are being upgraded for growth.”
He added that the United States is largely self-sufficient in oil, so pressure from the Gulf conflict is less pressing for the world’s largest economy.
“Inflation is likely to accelerate if the Strait of Hormuz remains closed, but investors seem to believe that neither President Trump nor Iran want to prolong this conflict,” Meadows added. “However, if the impact of the conflict is not resolved, at some point it will lead to demand destruction that investors cannot ignore. But we are not there yet, and while the market is led by a small number of stocks, the flow of positive news for these companies outweighs the uncertainty in other sectors, such as consumer stocks.”
Bond yields soar
Since the outbreak of war, the price of government bonds has fluctuated, but yields on sovereign bonds are still rising.
Bond yields and prices move in opposite directions, so rising yields mean continued downward pressure on asset values.
U.S. Treasury yields are among the sharpest increases since the war, as investors scramble to price in higher inflation and hawkish monetary policy. Last month’s yield was 30 year treasury This was the highest level since before the financial crisis.
A similar pattern can be seen in many major economies.
Britain is also experiencing domestic political turmoil, with national debt, known as the national debt, plummeting. gold leaf — Sell especially aggressively.
Neil Birrell, chief investment officer at Premier Mitten Investors, told CNBC that the bond market believes there is “something really worrying about it,” citing concerns about higher inflation, lower growth and supply chain disruptions.
“The duration of inflation and interest rate increases is probably more important than their absolute peaks, and as current conditions look set to persist, economic growth will likely remain weak and bond yields will likely remain high, making it difficult for stock prices to sustain their levels,” he said.
Oil prices fall, but concerns remain
The Strait of Hormuz, a key oil shipping route in the Middle East, was effectively closed during the war, resulting in wild swings in oil prices as traders reacted to headlines about missile attacks, peace talks and ceasefires.
Prices have fallen significantly from their wartime highs, but are still far higher than they traded before the conflict began. global benchmark brent crude oil futures The U.S. is trading about 36% above pre-war prices; West Texas Intermediate Futures It’s still up nearly 50%.
The closure of the Strait of Hormuz, along with the damage and closure of major energy production facilities in the Middle East, is creating severe supply constraints.
Supply issues are forcing oil importers to look for alternative suppliers. U.S. crude oil exports have increased over the past 100 days, and Tamas Varga, an analyst at PVM Oil Associates, said this is one of the “ostensible mitigating factors preventing significant price increases” in the oil market.
“These include the release of strategic oil reserves, sanctions relief for Iranian and Russian floating oil, reductions in Chinese oil imports, alternative routes to transport oil from the Persian Gulf to Asia and Europe, increased exports of U.S. crude oil and refined products, and finally demand destruction,” he said.
But he added that if crude oil inventories continue to deplete through June, they will reach operational criticality levels and intensify competition for supply. If that happens, “a breakback above $100 would be imminent,” he said.
Varga added: “It is essential to reopen the Strait as soon as possible in order to alleviate supply shortages and, as a result, inflationary pressures.”
inflation is rising
Economic data is beginning to show that the war is having far-reaching effects beyond financial markets.
With energy costs remaining high due to the ongoing war, rising prices for oil, gas, jet fuel and gasoline are starting to push prices higher in inflation statistics across major economies.
In the United States, the consumer price index reached an annualized rate of 3.8% in April, the highest level in about three years.
Declining energy supplies from the Middle East are a major factor in the rise in inflation, but soaring prices have prompted government intervention in some countries, including Germany and India.
Paul Sagay, managing director of Kingswood Group, questioned whether the market had become “generally numb to global war”.
“Is what we are seeing, if not a return to TACO trade, then simply a general indifference to the constant changes in White House policy?” he said.
“First, for the sake of humanity, I hope not. Second, we’ve seen developments like this before. The big market moves early in the trade discussion were heartbreaking. Over time, tariff changes may not even be recorded on tape.”
“What we’re seeing is that support for the U.S. war is at an all-time low, military spending is at an all-time high, and both sides are definitely looking for a face-saving exit. This is likely to be impacting long-term oil prices rather than the current situation. No one wants to be here in six months.”
—CNBC’s Bryn Bache, Emilia Hardie and Emma Graham contributed to this report.
