The crisis in the Middle East is bad news for the global economy. This should push monetary authorities to stop the rise in key rates.
Resilient stock markets
Usually, any new conflict, especially when there are no warning signs, is terrible for the evolution of stock prices. Indeed, stock exchanges around the globe had a difficult day on the first trading day after the attacks. But investors did not panic, and valuations almost everywhere quickly erased initial losses.
This is due to the ultimately local nature of the conflict. The military confrontation is limited between Israel and the Hamas branch in the Gaza Strip, a small territory 40 km long by 6 to 12 km wide, wedged between the Jewish state and Egypt. Extending the conflict to other protagonists would, however, completely change the economic consequences, particularly at the energy level.
A nervous energy sector
The Middle East region is essential for global energy supply. Therefore, the attacks of October 7 immediately caused an increase in the oil price of almost 4% and even 12% for gas on the European market because Israel is, via Egypt, a significant supplier for the old continent.
Unlike the stock markets, which have quickly recovered, nervousness persists in the energy market. The speakers fear Iran's involvement, Hamas' primary logistical and financial support. If it turns out that the Tehran authorities are the sponsors of the attacks, there is no doubt that Israel will strike its Iranian enemy. But with more than 3 million barrels per day, Iran is a significant oil producer. It is all the more so in recent times for the market balance as the country has enormously increased its production over the past year, mitigating the decrease in production orchestrated by Saudi Arabia and Russia. In addition, a quarter of the world's oil trade crosses the boundary of Iranian territorial waters via the Strait of Hormuz.
A military action or new sanctions against Iran would strongly impact the oil market and would not be a first. From 2011 to 2014, the price of Brent, today at less than $90, fluctuated around $110 per barrel due to the tightening of international sanctions against Tehran and the Syrian conflict.
The bond market at a crossroads
Investors have understood that the main threat of the crisis is a surge in energy prices. If this scenario materializes, inflationary pressures will be revived, forcing central banks to either tighten their policy further or at least keep policy rates at their current high levels longer.
But on the other hand, a further spike in energy prices is likely to be much of a shock to the global economy. This is particularly the case for Europe, where the economy has already been practically at a standstill for several quarters.
Between fears of a new price drift and increased risks of economic crisis, investors have chosen the 2nd scenario. At highs before the October 7 attack, interest rates fell sharply in the following days. If this is not the first time bond yields have fallen sharply after reaching a peak, this time is probably the actual start of a trend change after the rise of recent years.
New headwinds for the global economy
Today, the situation in the Middle East is a new uncertainty in a world that was already full of it. And each additional uncertainty delays decision-making and increases the required risk premiums. An increasingly uncertain environment is also weakening household morale and risks curbing consumption. However, this crisis is not an insurmountable obstacle but a new grain of sand that can bind the economic wheels mainly if the conflict spreads and disrupts the oil market.
This scenario is not on the agenda today, and there is no need to change its investment policy accordingly. A properly diversified portfolio with a long-term perspective remains at the heart of our strategy.
