Investors are bracing for volatility in global stock markets as the US airstrike on Iran over the weekend raises the risk of escalating tensions in the Middle East and a possible spike in oil prices, sending shockwaves through energy, trade and shipping markets. Volatility is expected to dominate markets in Asia, Europe and Wall Street.
The crisis in the Middle East is now the dominant issue for markets, naturally overshadowing even the expected release of US economic data this week. Investors are trying to assess the impact of US President Donald Trump’s sudden decision to support Israel’s military campaign against Iran on the outlook for inflation, interest rates and global economic stability.
Risk to stocks, oil rally
It’s hard to imagine stocks not reacting negatively, Trust Economics says. The extent of the reaction will depend on how Iran responds and whether there’s a rise in oil prices. So far, oil prices have already risen sharply due to the crisis, while stock markets are cautious. Investors fear that a persistent rally in oil could lead to higher inflation and overturn expectations for a Fed rate cut.
Fed worries about inflation
On Wednesday, June 18, the US Federal Reserve kept interest rates unchanged, but hinted that cuts are expected later this year. At the same time, it stressed that increased inflationary pressures — in part from tariffs imposed by the Trump administration — may slow the pace of cuts. The question now is how oil prices will move and how that will affect inflation, with direct consequences for the Fed’s monetary policy, reports Trust Economics.
S&P 500 Under the Microscope
The S&P 500 index remains below February highs, although it has recovered from April losses. However, the risk of renewed pressure remains, especially if the situation in the Middle East worsens and oil prices surge further. The market is waiting for Tehran’s reaction and Washington’s next moves. Until then, a cautious mood and selling orders seem likely to dominate the first sessions of the week.
Israeli markets hit record highs after US attacks on Iran
Israeli stock markets recorded significant gains on Sunday, following US attacks on Iranian nuclear facilities, which, investors believe, are expected to prevent Tehran from developing nuclear weapons in the near future.
The Tel Aviv 125 index closed up 1.8%, extending last week’s gains to nearly 8%, while the blue-chip TA-35 index rose 1.5%.
Stocks rose in all five sessions last week, partly due to Israeli strikes on Iranian nuclear and military targets that began on June 13.
Most stock markets in the Gulf were trading higher on Sunday, relatively unscathed by the escalation of tensions in the region following US strikes on Iran’s nuclear facilities, as investors assessed the potential economic impact of the conflict.
“Game changer”?
Can the destruction of Iran’s key nuclear facilities by US forces be seen as a “positive development” under certain circumstances, improving regional security and limiting Iran’s military and nuclear capabilities?
This will depend on Iran’s reaction in the long term, not the short term, where in the last case, the rockets launched by Iran against Israel in retaliation, resulting in injuries to many and damage to Tel Aviv, local markets continue to reward military actions.
Positive effects on bonds, exchange rates and risk
In parallel with the rise in stocks, government bond prices also increased, while the Israeli currency (shekel) strengthened, and the risk for the country decreased. Bond prices rose as much as 0.2% on Sunday, while the shekel, which does not trade on Sundays, rose from 3.61 per dollar on June 11 to 3.48 on Friday, June 20, gaining about 1% over the month.
Outlook
The current situation could open up real investment opportunities, possibly related to the rapprochement between Saudi Arabia and the United States.
However, Trust Economics reports that the sharp rise in markets last week may have already priced in a significant amount of these expectations. A likely scenario is further gains in stocks, corporate bonds and government bonds, at least in the initial phase.
