U.S., Israel’s attacks on Iran and financial markets

U.S., Israel’s attacks on Iran and financial markets

The U.S. and Israel’s attacks on Iran killed key leadership positions, including supreme leader Khamenei, resulting in a leadership vacuum. Iran’s Revolutionary Guard immediately launched attacks on U.S. military bases, aircraft carriers, and Israel, increasing uncertainty in the Middle East. Countries in the Middle East that have been attacked by Iran have announced that they have the right to respond to Iran, and U.S. President Trump has stated that the attacks will continue until the target is reached. Iran also raises the possibility of a substantial blockade, including attacks on U.S. and British oil tankers passing through the Strait of Hormuz.

As a result, international oil prices rose by more than 7 to 9 percent, with the WTI exceeding 72 dollars. Gold and silver metals also rose by nearly 3 percent. Dow, U.S. S&P 500 and Nasdaq futures fell by more than 1 percent after hours. German, French and U.K. futures also fell by more than 1 percent. U.S. VIX index also rose by more than 7 percent. Japanese Nikkei futures fell by more than 2 percent, further increasing preference for safe assets.

Meanwhile, major investment firms argue that if a complete blockade of the Strait of Hormuz materializes, there is a risk of an additional $10-$15 rise in oil prices in the short term. The surge in energy prices is expected to put downward pressure on the economy to reduce real GDP of major oil importers, including South Korea, by about 0.3 percentage points to 0.4 percentage points. In addition, inflation is also expected to rise by 0.2 to 0.5 percentage points in the first quarter, which is likely to halt the existing rate-cutting cycle.

Therefore, the stock market is expected to weaken in the short term as risk aversion sentiment spreads in the short term. As a result, the portfolio is expected to shift to safe assets. However, it is noted that the plunge immediately after the geopolitical shock of the 9/11 terrorist attacks or the Iraq war in the past tended to rebound in the mid to long term. Of course, the direction was determined according to the economic situation at each period, so there was not only a rebound after a decline. Rather, there was a flow of continuous adjustment and portfolio adjustment based on this.

In the end, short-term volatility is inevitable, and if international oil prices continue to rise, downward volatility is expected to increase further. In particular, the fear of the market is real as the call skew, which represents the demand for hedging rising oil prices in the options market, has reached its highest level in the past 15 years. If the situation ends in the short term, an influx of backlash buying is expected, but whether or not it will be prolonged and the period of substantial lockdown in the Strait of Hormuz will be the most important key to determining the future direction of financial markets