Middle East crisis risks igniting inflation. Here are the markets to watch out for in Australia

Rising oil prices, spurred by Middle East tensions, could add 12c/litre to petrol costs, potentially complicating the Federal Reserve's rate cut plans due to inflationary pressures, though the RBA's anticipated rate cuts are expected to remain unchanged. Gold prices have surged to record highs as a safe-haven asset amid economic and geopolitical uncertainty, driven by the 'sell America' trade and concerns over the US economic outlook. Global share markets are experiencing volatility, with energy and gold stocks rising while travel and airline stocks decline, reflecting investor concerns about the conflict's impact on fuel prices and travel demand.

Analysis

Heightened geopolitical tensions in the Middle East are significantly impacting global financial markets, primarily through a surge in oil prices, which have climbed from $US62 to approximately $US74 per barrel. This increase, potentially adding 12 cents per litre to petrol prices according to AMP's chief economist Shane Oliver, poses an inflationary risk that could complicate the Federal Reserve's anticipated interest rate cuts, especially as President Trump's anti-inflation strategy relied on falling energy costs. Conversely, the Reserve Bank of Australia's rate cut trajectory is expected to remain less affected, with markets still pricing in three cuts this year. Gold prices have reached record highs, nearing $US3,500 an ounce, driven by its safe-haven appeal amidst economic and geopolitical turmoil, a trend pre-dating the latest Middle East flare-up and amplified by a "sell America" sentiment stemming from concerns over US tariffs and its broader economic outlook, which has also boosted interest in Bitcoin. Global equity markets, including the ASX, are experiencing heightened volatility; gold stocks and energy companies like Woodside (WDS) and Paladin are rallying on supply concerns, while travel and airline stocks such as Qantas and Flight Centre are declining due to fears of reduced bookings and higher fuel costs. AMP notes that the share market is likely to remain volatile in the near term, reflecting a cautious market sentiment with a general impact score of 0.65.

Key Decisions for Investors

• Investors should closely monitor geopolitical developments in the Middle East, as these are primary catalysts for oil price movements, inflation expectations, and subsequent central bank policy decisions.
• Consider tactical allocations towards commodities, particularly gold due to its strong performance as a safe-haven asset, and energy sector equities like Woodside (WDS), which are currently benefiting from supply concerns, while exercising caution with sectors vulnerable to rising fuel costs and travel disruptions, such as airlines.
• Re-evaluate exposure to US assets in light of the observed "sell America" trade and weakening confidence in the US dollar, potentially exploring currency diversification or hedging strategies.
• Prepare for sustained market volatility, particularly in equities, by employing robust risk management techniques and maintaining a flexible investment approach.