International markets appear to be reacting calmly to the latest escalation in the Middle East. However, a reaction from Israel is expected with concern, particularly on the oil market.
Both the stock and commodity markets appeared to react calmly on Monday to Iran’s major attack on Israel over the weekend. This may seem surprising at first glance, especially since further escalation of the conflict cannot be ruled out.
This reaction is partly explained by the fact that markets were already prepared for a military strike by Iran. For example, the German DAX stock index had already fallen significantly in the days after the Israeli air strike on the Iranian representation in Damascus on April 1st. By Friday, prices had fallen by a total of three percent.
Market participants also justified the fact that things were looking up again on Monday with a certain relief that Israel and other countries were largely able to repel the rocket and drone attacks. Commerzbank chief economist Jörg Krämer also pointed out in an interview with the ARD financial editorial team pointed out that none of the parties was interested in further escalation and a conflagration in the region.
What is also important is the fact that after a phase of extreme uncertainty, the markets are now dealing with a fait accompli. “Buy when the cannons are roaring” is what the often quite unempathetic stock market language means.
Gold and oil prices are falling
Something similar can be observed in the raw materials markets. Gold, which is considered a “safe haven,” is also under selling pressure on Monday after the price of gold reached historic highs of over $2,400 per troy ounce on Friday.
The oil markets always react particularly sensitively to developments in the Near and Middle East. But oil prices also fell again on Monday. Since mid-December, however, crude oil has become significantly more expensive due to the impact of the Gaza war and seasonal effects. A barrel (159 liters) of the European reference Brent variety was temporarily available for less than $74 in December. On Friday the price temporarily jumped above $92.
Concern about attacks in the Persian Gulf
Further Western sanctions are likely to have only a limited effect on Iran’s oil exports, which has its most important buyer in China. However, military strikes against the country’s oil infrastructure would drive up prices.
Markets are even more worried that Iran could attack oil shipments and energy facilities in the Persian Gulf and endanger the passage of the Strait of Hormuz. Around 90 percent of the Gulf states’ energy exports flow through the strait. The Islamic Republic recently demonstrated that it can seriously disrupt these transports in 2019, when it had oil tankers hijacked in the conflict over the nuclear deal with the West.
Israel’s reaction is crucial
Given these risks, the raw material markets remain very tense. Like many other experts, the raw materials analysts at the US investment bank Goldman Sachs point out that further price developments depend in particular on Israel’s reaction. Israel’s response will determine the extent of the threat to the region’s oil supply, Goldman Sachs said. Israel’s response is “highly uncertain.”
Analysts at investment bank RBC Capital Markets wrote that the situation in the Middle East could not escalate further if the Israeli government followed the advice of the US government and refrained from retaliatory measures.
According to media reports, Israel’s leadership has not yet decided how to respond to the Iranian attack. The international financial and raw materials markets have entered the next phase of uncertainty.