• Middle East conflict boosts demand for safe-haven assets
• Investors shift into Treasuries, gold, Swiss franc
• Oil market and Strait of Hormuz closely monitored
• Strategists warn equities face further near-term pressure
Investors are swinging wildly into safe-haven investments due to the growing conflict all over the Middle East that is shaking world markets causing some strategists to declare it a haven first, ask questions later wave. Trading in the futures market was lower at the opening as the demand boosted in the U.S Treasuries, gold and Swiss franc, as the Asian market opened while the equity futures were pulled down by last week declines.
Bloomberg market data indicated that Brent crude on Friday closed at its highest point since July and S&P 500 on the same day dropped by 0.4 per cent of the stock nearly capping its worst monthly loss since March. Flight to safety led to a fall in U.S. Treasury yields at the short-end of the curve, the last time it was at these levels was in 2022.
Gold gains were compounded as investors put a buffer against geo political instability and there being a greater chance of increase in energy prices which in turn would lead in inflation. John Briggs, the U.S. rates strategy head at Natixis, told traders will probably extend safe-haven positioning. The magnitude of attacks and retaliation taken by Iranians is bigger than what was anticipated by the market, he said.
Hormuz Risk and Oil Shock In The Limelight
One of the issues of interest to the markets is the Strait of Hormuz, which is a small waterway conducting an estimated quarter of global shipped oil. According to Dave Mazza of Roundhill Financial, the flows in the strait will decide the deepening of the equity selloffs. It is a matter of Hormuz risk, rather than retaliation. In the case of shipping remaining open, stocks are able to pass through shipping, Mazza said. "If it doesn't, all bets are off."
According to Bloomberg data, Saudi Arabia Tadawul All Share Index declined by almost 5 percent in the initially open on Sunday but regained a considerable part of the losses. Bitcoin that had plummeted during the first shock had stabilized around 68,000. Deribit showed that there was a total of $1.87 billion in put options at the 60,000 strike amounting to the fact that there is still a need to get downside cover.
According to strategists, rich valuations in the equity and credit markets have enabled the investors to reduce exposure. According to Ed Al-Hussainy, Columbia Threadneedle Investments, the markets had already started struggling with the changing policy on tariffs in the U.S, artificial intelligence, and stress of other credit providers and finance among the private. And the de-risking is as much anyone guesses, as it is much less than anyone thinks.
Short Run Relocations vs. Structural Effect
Vincent Mortier, the chief investment officer at Amundi foresees the volatility in the near future. Short-term, as we await more information about the effects of the events, we can anticipate spiking oil price (5% to 10%), falling US rates, rising gold up and falling equities a little (around 1%), he says. Barclays strategists cautioned on purchasing dips within a short period of time.
According to Ajay Rajadhyaksha, global chairman of research at the bank, investors have become used to geopolitical spurts dying fast but this episode has potential disruption consequences, such as terror attacks on the Iranian leadership or shipping routes. The risk-reward, as Rajadhyaksa said, does not appear compelling.
A pull back of equities by a substantial amount (more than 10 percent in S&P 500) will almost inevitably be followed by time to buy. But not yet." Outsized pressure can be made on emerging markets. According to Brendan McKenna of Wells Fargo, the shock may undermine the currencies and the assets of emerging markets especially as most economies depend on oil imports.
Meanwhile, Gregory Faranello of Amerivet Securities claimed that Treasury yields might fall further in the short-run, but taking into consideration the Federal Reserve policy and economic fundamentals, the overall trend will not be reliant on the conflict itself. The conflict between the safe-haven demand and risk of inflation was emphasized by Maxence Visseau of Arkevium. In case of a runaway of crude to Hormuz to between 80 $90 once the Hormuz is disrupted, the long-end trades in a tug of war between safe-haven and the re-pricing of inflation expectations, he said. Changes in the sector were also noted by analysts.
Joe Gilbert of the Integrity Asset Management anticipates the energy, metals, utilities and defense stocks to perform better, although consumer discretionary shares would be on the losing side due to the rise in fuel prices. According to investors in JPMorgan Private Bank, what they went through supports the necessity of portfolio resilience. These risks are all about energy, strategists wrote, even considering the fact that even the threat of disruption can affect the level of inflation expectations and monetary policy outlooks.
Although geopolitics flare-ups in the past have triggered temporary equity selloffs instead of sustained bear markets, the magnitude of high valuations, wary sentiment and sensitivity of the energy market has widened the surveillance in asset classes. When tomorrow (Monday) trading returns to normal and full scale, the focus will be glued on how the flows of oil through the Strait of Hormuz are going and on the possibility of energy prices going on an upward trend, which may define the direction of global markets in the coming days.
