The financial markets are in a nervous mood this morning, as investors fear escalating tensions in the Middle East after Iran’s military strike on Israel last weekend. Many Asia-Pacific stock markets have fallen into the red, with Japan’s Nikkei losing almost 1% today, amid fears that open warfare could erupt in the region.
However, there is also relief that Iran’s first ever direct attack on the Israeli state did not cause more damage, with almost all the drones and missiles intercepted, leading to hopes that further retaliation and escalation could yet be avoided.
The oil price, a bellwether for Middle East tensions, has dropped slightly this morning. Brent crude is trading at about $90 per barrel – away from last Friday’s six-month high of $92 a barrel. Oil has risen this year, up from $75/barrel at the start of January, indicating that a geopolitical price premium had already been built into the cost of energy.
Reports that President Joe Biden has told Israel’s PM Benjamin Netanyahu that the US wouldn’t support any Israeli counterattack against Iran suggest there is more caution about an escalation.
This uncertain backdrop means that markets haven’t sold off further this morning relative to Friday, before the Iranian attacks, explains DeutscheBank strategist JimReid. He told clients this morning: "Since last Friday, geopolitics has returned as the biggest concern for markets, as investors react to Iran’s attack on Israel over the weekend. But since markets have reopened after the weekend, the reaction among key assets has been subdued, with investors hopeful that any escalation will prove contained."
The agenda • 10am BST: Eurozone industrial output for Feb • 1.30pm BST: US retail sale for March • 3pm BST: NAHB’s US housing Market Index
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