The attention of operators is shifting from the macroeconomic situation to the geopolitical one, as the growing tensions in the Middle East could potentially have significant effects on financial markets.
Let's see how:
Iran, despite Western sanctions, remains an important player, producing about 3 million barrels per day, which corresponds to 3% of the global total.
The regime in Tehran exercises significant influence over the Strait of Hormuz, the most important strategic point in the world for oil trade, through which approximately 21 million barrels pass daily, corresponding to 21% of the global total. You can find more information about this HERE.
We have already seen in recent months how the Houthis (Iran’s proxy) have been able to create severe problems in the Red Sea, attacking Western cargo ships passing through the area.
The fear is that a war between Iran and Israel could drive inflation higher for two reasons:
First, oil prices could rise, generating an increase in the cost of all goods and services linked to it, and in addition, if the Red Sea were to become a dangerous transit area again, forcing cargo ships to extend their journeys via South Africa, the goods transported would become more expensive due to higher transportation costs.
At a time when financial markets are currently supported by the prospect of a series of interest rate cuts by the end of 2024 and into the next year, a new spike in inflation caused by a war between Iran and Israel could force central banks to cancel their rate-cutting plans, which could have a particularly negative effect on stock markets.
The dynamic explained above represents the worst-case scenario for the coming period, but given the escalation we are witnessing, it might be important to be prepared for any eventuality.
More than ever during this period, we recommend monitoring market sentiment through the CME tool called FED Watch, which today shows a 67% probability of a 0.25% rate cut at the next meeting on November 7, and a 33% chance of a larger cut of 0.5%. For stock market stability, it is important that these probabilities remain distributed in this way in the coming period because if, on the contrary, tensions in the Middle East increase to the point of canceling the likelihood of a rate cut on November 7, one could potentially expect a period of significant market weakness.
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