The outbreak of the conflict in the Middle East hit the stock markets in Europe and emerging economies the hardest. However, the American stock markets defended themselves and the dollar went up. Wall Street fears that a prolonged war could push the price of crude oil above $100 a barrel. Wartime uncertainty and inflation are a serious threat to the local economy.
Bank of America: Capital is fleeing to oil and the dollar
If the war in Iran continues, European and Japanese markets, which previously grew thanks to the boom in the banking sector, will suffer the most. This will happen primarily because investors will redirect capital from these regions to the oil market and towards the US dollar.
“Investors are likely to direct capital to assets favored by prolonged conflict, at the expense of oil-importing markets where energy companies' participation is minimal, such as South Korea, Japan and Europe,” Michael Hartnett, chief strategist at Bank of America, wrote in a note to investors.
In turn, US technology and global defense stocks may benefit from this asset rotation.
This scenario gained momentum already in the first days of the war. For European and Japanese stocks, it was the worst week since April last year, when the world was shocked by the tariffs announced by Donald Trump.
The first week of the conflict brought the most severe losses on emerging markets. These regions, especially Asia, are hit hardest by the double shock: interruptions in supplies of energy raw materials from the Middle East and the growing strength of the dollar.
Before the escalation of tensions, emerging markets, especially in Asia, enjoyed increased investor interest. Capital flowed primarily to dynamically developing companies from the artificial intelligence sector.
Even though these shares fell significantly in the first week, and the MSCI Emerging Markets index fell by about 7 percent, market participants did not lose hope yet.
“Investors do not seem willing to abandon their positive structural bias, at least for now,” Bank of America strategists point out.
Before the outbreak of the conflict, capital flowed widely to emerging countries in Asia, Latin America, Eastern Europe, the Middle East and Africa, encouraged by strong economic growth and mild inflation and loose monetary policy.
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BTIG: We are in a low point, it's time for more aggressive investments
While investors in European and emerging markets panicked due to airstrikes launched by the US and Israel, US stock markets alone lost less than 1% this week.
The better behavior of American stock exchanges during the conflict contrasts with this year's trends, when capital moved from America to other markets.
Analysts of the BTIG financial group believe that a favorable opportunity to invest in American shares is now opening.
“We have reached the bottom and now we should act more aggressively, not defensively,” say BTIG analysts.
In their opinion, at least several American stock market sectors have already reached the bottom.
“We see troughs in the aviation, consumer, banking, cryptocurrency, software and China sectors, while the energy and basic goods sectors, from a tactical perspective, seem to have already peaked,” BTIG experts say.
For example, shares of energy companies have risen by about 25% this year on the wave of the surge in oil prices, while shares of airlines have fallen by about 2.5%.
Goldman Sachs CEO: Markets' reaction to the war was surprisingly mild
David Solomon, president of the American investment bank Goldman Sachs, admitted that he was surprised by the calm reaction of financial markets to the situation in the Middle East.
– I'm watching the markets' reaction and, honestly, I'm surprised. The reaction was mild, Solomon said.
According to him, investors are now trying to assess whether the conflict will last long and whether it will affect consumption.
“It's very difficult to speculate because there are still a lot of unknowns at the moment,” Salomon said in an interview with Australian media.
He also added that markets will need several weeks to fully digest these consequences.
Paul Krugman: This may be the straw that breaks the camel's back
Events in Iran could have serious consequences for the American economy. Paul Krugman, an economist and Nobel Prize winner, was not optimistic about the condition of the US even before the attacks, which in his opinion was suffering due to the tariffs introduced by Donald Trump.
– Our economy is under enormous pressure and this may be the last straw. A drop that gets heavier the longer the war goes on, Krugman wrote on his Substack blog.
According to the economist, the chances of ending the war quickly are decreasing, and the Trump administration has not presented a specific plan or timetable for its duration.
Krugman believes the blockade of the Strait of Hormuz could last for weeks, which would keep oil prices high. Expensive raw materials and war spending are weighing on the American economy, which is already under strain due to artificial intelligence. This creates a dangerous scenario.
– There is widespread concern about artificial intelligence, both because of the bubble that may burst and the job losses that it contributes to – notes the Nobel laureate.
– Many people, including me, are worried about financial stability. In many respects, we have restored the risks associated with “shadow banking” that led to the crisis in 2008, he adds.
JPMorgan CEO: Inflation could spoil the party
Jamie Dimon, president of JPMorgan bank, warns that rising prices may have a negative impact on the American economy.
“There is a risk that inflation will be much higher than people expect, and if that materializes it could spoil the party.” Let's hope this won't happen, said the head of the largest American bank in an interview for CNBC.
The latest January inflation data in the US indicate a price increase of 0.2%. on a monthly basis and 2.4 percent year to year. Although inflation is above the Fed's target, the pace of price increases has slowed noticeably compared to previous years. However, immediately after the publication of these data, a conflict broke out in the Middle East, spreading fears about the prices of energy raw materials.
– For now, it will slightly increase fuel prices and if this situation does not last long, there will be no major inflation shock. However, if it is prolonged, everything will turn out differently, warns Dimon.
Goldman Sachs expert: Investors do not trust Trump's promises
Trying to assess how long the conflict-induced shock in the oil market will last, financial market participants are closely monitoring the situation in the Strait of Hormuz, where Iranian threats and attacks have virtually halted shipping.
According to Goldman Sachs analysts, investors are not very confident that the safety measures promised by the US for tankers carrying oil and gas will solve the problem in this area.
“There are a lot of practical questions about how ship escorting will work given the large number of tankers,” Samantha Dart, co-head of global commodities at Goldman Sachs, said in an interview on Bloomberg Television.
The expert also questioned how effective an American military escort would be in defending against drone attacks. Earlier, Donald Trump suggested that the United States could provide insurance and cover for warships to prevent transport paralysis.
According to specialist forecasts, if tanker traffic through Hormuz is suspended for five weeks, the price of Brent crude oil may exceed $100 per barrel.
At the beginning of the week, Goldman Sachs analysts raised their Brent oil price forecast for the second quarter by $10, to $76 per barrel. However, late on Friday afternoon, due to unrelenting concerns about the supply of raw materials, the price of a barrel of Brent crude oil jumped to almost $90.
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