Sunday marks 100 days since the war in the Middle East began, and the conflict continues to drive substantial volatility across all asset classes in every region of the world as a lasting peace deal remains elusive.
Negotiations between the U.S. and Iran have stagnated, with Washington and Tehran sending mixed messages on the state of peace talks and both sides periodically exchanging bouts of military attacks. Nevertheless, a fragile ceasefire remains in place to allow for diplomacy to take place.
As the conflict drags on, pressure continues to mount on certain economies and pockets of financial markets.
Wall Street bulls shrug off the war
In the immediate aftermath of the U.S. and Israel’s initial strikes against Iran, stocks across the globe sold off. While shares listed in some markets have struggled to regain momentum, Wall Street’s major averages have wiped out initial losses as investors look through the war, higher oil prices and the impact of the conflict on inflation. The S&P 500 has hit new all-time highs even as the war continues.
Iain Barnes, chief investment officer at Netwealth, said equity markets had been dominated by the assumption that the war will swing major energy-importing economies from a “benign disinflationary environment” into a stagflationary one. But optimism over AI’s future disruptive power and a profitable backdrop for U.S. companies have also come into focus.
“This has seen equity markets power higher but clearly led by those companies in the U.S. and Asian markets which are seen as direct beneficiaries of AI spending,” he said in an email. “European stocks have been more subdued as the impact of rising energy costs is more problematic.”
“The spending on AI infrastructure has identified a number of potential bottlenecks, not least the insatiable demand for compute capacity that is fueling the share prices of semiconductor stocks,” Toni Meadows, head of investment at BRI Wealth Management, told CNBC in an email.
“Markets and whole economies like South Korea and Taiwan are getting upgrades to growth because of it.”
He added that as the U.S. is largely self-sufficient in oil, the pressure created by conflict in the Gulf is not as immediate for the world’s largest economy.
“If the Strait of Hormuz remains closed, inflation is likely to pick up but investors seem willing to believe that neither Trump nor the Iranians want to prolong this conflict,” Meadows added. “That said, at some point the impact of the conflict, if unresolved, will lead to demand destruction that investors can’t ignore. But that point has not been reached and although markets are being led by a small number of stocks, the positive news flow for those companies is outweighing uncertainty for other sectors like consumer stocks.”
Bond yields spike
Government bonds have been volatile since the war broke out, but yields on sovereign debt remain elevated.
Bond yields and prices move in opposite directions, so elevated yields mean downward pressure on the…
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