Column: why markets seem unfazed by the US-Iran conflict

How important is the war between the US and Iran to investors? Looking at the financial markets, it would appear that it’s not important at all.

Apart, perhaps, when it’s trotted out to provide a narrative for market behaviour.

As a recap, it began with a joint US/Israeli attack on Iran at the end of February.

The news caught investors on the hop to some extent, particularly as it happened over a weekend. Oil prices were key.

These had been falling more or less steadily from their peak of around $130 (front-month WTI) soon after the Russian invasion of Ukraine in February 2022, before bottoming just below $55 per barrel in December last year.

Oil prices had started to pick up earlier this year to trade around $67 just ahead of the breakout of hostilities.

It gapped higher (by around $7) as markets reopened on the Sunday night following the initial attack.

But it then took a whole week before oil surged above $115 before reversing sharply.

Depending on which measure one uses, Brent or WTI, front-month or a continuous pricing contract, that pretty much marked the high point for oil prices.

Since then, it has spent most of its time trading within a $20 range.

As far as the US dollar is concerned, there has been plenty of chatter about how the greenback has benefitted from a ‘flight to quality’ move as investors sought out the safety of a deep, liquid market in which to park their funds.

It took around a fortnight for the cash Dollar Index to push back briefly above 100.00 from around 97.45 before the outbreak of hostilities. It’s currently around 99.00, or up around 1.6% from pre-war levels.

That’s not a huge move. Yet it has proved sufficient to explain away the drop in gold (18%) and silver (25%) from the highs at the beginning of March.

That’s a poor performance from the two precious metals, considering that they are both generally viewed as the ultimate safe havens when things are going badly.

But was it all due to dollar strength? Unlikely. One has to add in the loss of confidence that followed the crash in both precious metals after their parabolic rallies at the end of January.

As to equities? Well, let’s focus on the US S&P 500. The S&P lost 8% in March, neatly hitting a low on the last day of the month.

Since then, it has roared higher. It took about a week to get back above pre-war levels, and another to take out its prior all-time high from late January, just above 7,000.

Since then, it has added roughly 8%. This has happened despite the fact that the war is about to enter its fourth month.

Bear in mind that the initial consensus view was that it would all be over by mid-April.

As I write this, US stock indices are once again soaring on rumours that the US and Iran have reached a deal, and that all it needs is President Trump’s sign-off.

Good news indeed, if true. But this is not the first time that peace has been promised only for hopes to be dashed.

Yet such disappointments have failed to put a dent in positive sentiment.

It could be that the Iranian regime’s nuclear ambitions have been curbed, along with its ability to support and export terrorism.

But the Strait of Hormuz has been effectively blocked for three months now.

Qatar’s liquefied natural gas facility has been closed since the war started, and much energy infrastructure has been damaged or shut down.

Global oil inventories have been run down, and even once shipping is allowed to pass through the Strait of Hormuz unimpeded, it will take months, or even longer, for stocks to be replenished and strategic reserves refilled.

Yet the bull run in global equites, led by tech, continues.

Investors can’t see an end in sight, and there’s quite a FOMO feel about it all. Does the war matter? It doesn’t look as if it does.

(This is a fortnightly column by David Morrison. He is a Senior Market Analyst at Trade Nation. Views are his own.)

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