Markets have reacted calmly so far following the escalation of geopolitical tensions in the Middle East over the weekend, though uncertainty remains over the extent of Iran’s response to US strikes on its nuclear capabilities.
A significant concern is the potential closure of the Strait of Hormuz, which roughly 20% of the world’s oil and liquefied natural gas passes through.
“The markets are not yet reacting with any degree of panic to the US airstrike on Iran’s nuclear facilities as they await to see how Tehran responds,” said AJ Bell investment director Russ Mould.
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“The promised two-week hiatus as the US weighed its decision didn’t materialise as the Trump administration acted on Saturday. After briefly spiking above $80 per barrel when the market opened in Asia on Monday, Brent pared those gains to trade modestly higher.”
Chris Beauchamp, chief market analyst at IG, said: “Markets have greeted the US strike on Iran with a collective shrug, clawing back overnight losses for stocks and oil prices firmly off their highs. Are investors being too calm?
“The scope of any Iranian response is still being determined it seems, but while it suits the regime to talk about closing off Hormuz, such a move would bring down further retaliation.
“At present, it looks like Iran has few good options, which may be enough to stay Tehran’s hand.”
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Gregor Hirst, multi asset CIO at Allianz GI, added that markets are entering a phase of elevated volatility.
“Much hinges on Iran’s next steps –especially any attacks on the Strait of Hormuz – and the broader diplomatic response. While verbal condemnations from regional and global powers are expected, we do not anticipate direct military involvement from neighbouring countries or major powers like China or Russia.”
Investors should prepare for short-term turbulence, with energy prices and inflation expectations at the forefront, but Hirst says this could be a moment to build positions.
“As in previous crises, volatility could again offer some attractive investment levels. Central banks, particularly the Fed, may need to reassess their policy trajectories if inflation accelerates while growth slows.
“In the coming days, clarity on the extent of damage to Iran’s nuclear infrastructure, the scale of Iranian retaliation, and the international community’s response will be critical in shaping market sentiment.”
