To state the obvious, war in Iran has shaken up financial markets this week. Stocks wobbled, bonds tumbled, the dollar snapped its losing streak, oil prices sprang higher and natural gas went whoosh. But investors are not bracing for disaster. Instead, it is more a case of them doing a bit of spring cleaning to their portfolios. This may well prove to be too sanguine.
We all know that the human cost of this war eclipses its financial-market impact. But we also all know that the Middle East’s almost unique capacity to trip up the global economy, and our joint prosperity, through the channel of oil and gas, makes this outbreak of violence through the region a matter of deep importance to the financial system. The potential for a serious economic and financial accident here is real.
And yet, every conversation I have had with analysts and investors in the past few days, and the tone of almost every research note, has been something like this: “Don’t worry. Yes, this could get bad. Very bad. But Donald Trump doesn’t want high petrol prices in the run-up to the midterm elections in November, so his military will not stick around. The conflict won’t last long, oil and gas supplies will quickly get back to normal. History says the wisest path is to keep a cool head and stay invested, especially as the US, home to the world’s dominant financial markets, is nicely insulated from any energy supply shock.”