Geopolitical Tensions: What They Mean for Markets

Geopolitical events, like the current air strikes between Israel and Iran, are significant occurrences that impact the political, economic, and social relations between countries. These events shape global politics and can have far-reaching long-term consequences on millions of people’s lives and livelihoods. While the human impact for those directly involved can be significant, global markets will only be impacted if these events affect the current or long-term outlook for asset values or have economic impacts. This week, we review the impact of current geopolitical tensions in the middle east and their market impact.

What has happened?

Tensions between Israel and Iran escalated into direct military strikes this week, triggering broader regional instability and heightening geopolitical risk. It is the most recent symptom of a long-standing and deeply complex geopolitical, ideological, and military contention. Since then, there have been retaliating attacks of increasing severity. Yet, so far, the market reaction has been muted.Why?

What has the market reaction been?

Geopolitical tensions don’t always translate into immediate or lasting market disruption. It’s worth remembering that markets are remarkably resilient to these kinds of shocks. Historical data shows that geopolitical events, even major ones, rarely have a material long-term impact on global stock markets.

The primary channel through which the Israel-Iran conflict may influence the global economy is the oil and gas market. The oil price surged at the outbreak of the conflict but remains far from highs seen even a year ago. Current oil prices, around $75 per barrel, suggest that markets have already priced in a degree of geopolitical risk. However, for prices to rise significantly and remain elevated, there would typically need to be a direct impact on supply or demand.So far, broader financial markets such as equities and bonds have shown limited reaction.

At this stage, the impact on inflation appears limited. However, a prolonged and substantial increase in oil or gas prices could contribute to upward pressure on inflation over time.

Future oil price movements could go in either direction:

• A further escalation - such as widening disruption in the Strait of Hormuz or broader regional involvement - could push prices toward $90 or higher.
• Conversely, a regime change within Iran could lead to increased supply expectations and potentially lower prices, possibly below $50.

How could oil prices rising impact your finances and investments?

Oil prices matter because when they rise, everything from filling up your car to buying groceries gets more expensive. That squeeze on spending can ripple through the market, making some investments riskier and others more valuable.

The escalation between Israel and Iran is, above all, a deeply concerning humanitarian crisis. Yet we can recognise markets have remained relatively stable so far, with oil prices contained and equities showing limited reaction. Looking forwards, much will depend on whether the conflict broadens or begins to impact critical supply routes, particularly in energy markets.

The Noise

• In terms of economic news, multiple major central banks decided on their monetary policy for June this week. Both the Bank of England (BoE), and The Federal Reserve (Fed) held their interest rates steady, at 4.25% and 4.5% respectively, amidst an uncertain inflation outlook with competing economic uncertainties and growing geopolitical tensions. The Swiss National Bank (SNB), in contrast, cut its interest rates to 0% as it struggles with a strengthening currency. With lingering economic and geopolitical uncertainty that could potentially impact inflation, central banks remain cautious in their outlooks for rate cuts.

• The UK had its latest batch of economic data, and it has shown signs of strain. Retail sales volumes in May fell by 2.7% month-on-month, marking the sharpest decline since 2023 and significantly exceeding the expected drop of just 0.5%. This steep decline suggests weakening consumer spending, which is a key driver of UK economic growth. Factors such as rising inflation, higher energy costs, and ongoing uncertainty around household incomes are weighing on shoppers. This downturn in retail activity adds to concerns about the broader health of the UK economy.

• Despite a broad consensus that the dollar is likely to continue to weaken, we note that the US currency had its strongest weekly performance in several months. This was partly due to stronger than expected economic data and fading hopes of early Fed rate cuts, along with support as a haven when geopolitical tensions rise.