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US Air Strikes on Iran: Implications for Financial Markets
In a significant escalation of the ongoing Iran-Israel conflict, the United States conducted targeted strikes on Iran’s nuclear facilities over the recent weekend. President Trump hailed the operation as a decisive blow to Iran’s nuclear capabilities, labelling the nation as the world’s foremost state sponsor of terrorism, and warned of further military action unless Iran pursues peace.
Iran’s Foreign Minister, Abbas Araghchi, condemned the strikes as “outrageous,” cautioning that they would have “everlasting consequences” and asserted Iran’s right to self-defence. This heightened political tension raises concerns over potential Iranian retaliation, including threats to close the strategically vital Strait of Hormuz — a passage for approximately 20% of global oil supplies — as well as potential attacks on US forces stationed in the region and cyber warfare activities.
Contrarily, financial markets displayed unexpected resilience in the wake of this alarming news. The S&P/ASX 200 index experienced only a slight decline of 0.36%, rebounding from earlier losses of 1.00%. Brent crude oil prices briefly surged by 4.1% to US$80.34 per barrel before settling at US$78.11, up by 1.2%. Meanwhile, gold, often sought as a safe haven, recorded a 0.8% increase to US$3,398 per ounce, before pulling back to US$3,355, down 0.48%.
This juxtaposition between sensational headlines and restrained market movements is a scenario that history has frequently illustrated.
Historical Performance of Markets during Geopolitical Conflicts
Analysis reveals that the S&P/ASX 200 typically averages a gain of 13.2% in the year following significant geopolitical events, provided there is no major global economic downturn. Insights from conflicts since 1990 show a consistent performance pattern for the ASX 200 at various time intervals.
Data suggests a bullish outlook, with the ASX 200 generally posting gains across all timeframes and being positive the majority of the time. Though initial market responses may be muted as situations develop, positive momentum often builds after the first week.
Reasons Behind Market Resilience During Conflicts
Several factors contribute to the tendency for stocks to rise following the outbreak of conflict:
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Resolution of Uncertainty: Markets generally react unfavourably to uncertainty. Initial fears may prompt sell-offs, but as the conflict’s implications become clearer, investor confidence tends to rebound, leading to a recovery in stock prices.
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Increased Government Spending: Conflict often results in heightened government expenditure on defence and infrastructure, stimulating economic growth. This influx benefits sectors like defence, energy, and logistics, lifting overall market indices.
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Geopolitical Risk Premiums: Certain industries, especially energy and commodities, can see price increases due to supply chain disruptions during conflicts, potentially translating to improved profits for those companies and boosting market valuations.
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Historical Market Resilience: Markets have consistently demonstrated a capacity to recover swiftly from geopolitical shocks, encouraging investors to "buy the dip" when the economic repercussions of conflicts seem limited.
- Central Bank Intervention: To mitigate economic instability during conflicts, central banks may lower interest rates or enhance liquidity, thereby creating a conducive environment for stock investments.
Current Risks Amidst the Crisis
Despite historical patterns indicating market resilience, several contemporary risk factors warrant caution:
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Vulnerability of the Strait of Hormuz: Iranian officials have threatened to disrupt traffic through this crucial oil corridor. Although a total blockade is unlikely due to the presence of the US Navy’s Fifth Fleet, there remains a risk of missile strikes or other tactics that could endanger shipping lanes, reminiscent of the 2019 attack in Fujairah.
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Iran’s Regional Retaliation Capabilities: Iran possesses short-range missile systems that could target Gulf energy infrastructure or US bases in the region. While retaliatory attacks may provoke significant responses, the thresholds for energy-related actions remain complex and nuanced.
- Dynamics of Proxy Networks: Iranian-affiliated militias in areas such as Iraq and Yemen may be reluctant to escalate military activities, fearing dire repercussions akin to those faced by Hezbollah or Hamas. Nonetheless, Tehran’s pressure could compel these groups into action if regime survival appears jeopardised.
Outlook for Investors
The situation remains volatile, with the potential for further escalation despite President Trump’s apparent strategy of "escalate to de-escalate." Analysts advise caution, warning that assumptions regarding the resolution of the crisis could be premature given the unpredictable nature of this ongoing conflict.
While historical precedent offers some optimism regarding market resilience, the unique challenges presented by the current crisis could test this tendency. Investors are encouraged to remain vigilant whilst recognising the markets’ historical capacity to rebound from geopolitical disturbances.
