Analysts react as markets brace for Iran response to US attack

Global shares slipped, oil prices briefly hit five-month highs, and the dollar firmed amid escalating Middle East tensions following U.S. strikes, though market reaction remains largely muted as investors adopt a wait-and-see approach for Iran's potential retaliation. Analysts attribute the subdued response to a perception that the event is contained or could even be a de-escalation, but caution that any Iranian retaliation, particularly concerning the Strait of Hormuz, would swiftly reprice geopolitical risk and increase market volatility.

Analysis

Global markets have entered a cautious, wait-and-see posture following U.S. strikes on Iran, characterized by a minor slip in global shares, a brief spike in oil prices to five-month highs, and a firming U.S. dollar. The market's reaction has been notably subdued, with analysts attributing this to a prevailing view that the conflict will remain contained and short-lived, potentially even leading to a long-term de-escalation by setting back Iran's nuclear capabilities. This muted response is reflected in minimal haven flows and only a slight adjustment in FOMC rate cut pricing, suggesting investors are currently more concerned with the potential inflationary impact from higher energy costs than a direct shock to global economic growth. However, significant tail risk remains. Analysts universally caution that any direct Iranian retaliation, particularly actions threatening the Strait of Hormuz, would trigger a rapid and aggressive repricing of geopolitical risk, shattering the current market calm. In this uncertain environment, there is an expectation for increased volatility and a strategic case for safe-haven assets, with one analyst from OCBC projecting gold could reach US$3,900/ounce over a 12-month horizon due to persistent global uncertainties and central bank diversification.

Key Decisions for Investors

• Closely monitor for any signs of Iranian retaliation, as rhetoric or action concerning the Strait of Hormuz would serve as a primary catalyst for a significant negative market shift.
• Consider reviewing or implementing portfolio hedges through safe-haven assets, such as gold and the U.S. dollar, to mitigate the impact of potential near-term volatility.
• Re-evaluate inflation expectations and their potential impact on central bank policy, as a sustained rise in energy prices could alter the trajectory for expected interest rate cuts.
• Maintain a defensive stance and prepare for elevated market volatility in the coming weeks, avoiding knee-jerk reactions to initial headlines while the geopolitical situation remains fluid.