Financial markets are risking less than the risk posed by the ongoing conflict in the Middle East, according to one political strategist.
In the one month since the US and Israeli invasion of Iran began, energy prices have seen a sharp rise in prices. However, some parts of the financial system are still very quiet.
“We’d probably say the markets have priced this out,” said Simon MacAllister, co-head of political strategy and partner at EY Ireland. “This day last week, US markets were only 6% below their record high since January, which doesn’t feel intuitively good. At the end of last week, it was 9%.
“So there is a worsening of the market but it’s probably not to the extent that we would think it’s a good sign of it.”
The movement of the bond markets has been of some importance in the past year, and many see it as a hindrance to some of the more surprising moves of the Trump Administration.
Its negative response to the US President’s first tariff plan caused him to delay implementation and ease his tenure – and many expect it to be the one that will prompt him to freeze his military presence in Iran.
But even though it has taken a limited view of the economic impact of the conflict, it has not been a big change so far.
“The level that seems to be the brake is usually 5% or 4.5% and last week it closed at about 4.4%. So it’s getting close to that.”
Feeding into that is a growing pessimism about the prospects for the US economy.
Our chief economist, America, has reduced American growth by about 0.4% and global growth by about 10%,” said Mr. MacAllister. “And it’s clear that they’re spending a lot of money on “One Good, Good Bill” – so they’re running a deficit of about 6% of GDP.
“So this all plays out in the market’s view around the US sovereign debt picture.”
Meanwhile, global supply disruptions are growing – not just for oil and gas, but for other commodities as well.
This also leads to consequences for companies, according to Mr MacAllister.
“We’re getting started, but I suspect we won’t see the full impact for another few months,” he said. “We now have a better understanding of other industrial products that come from them [materials] which will be missing in the next few months.
“And what does that cause as a second- or third-order effect on supply chains when people are working with scarcity and those?”
And eliminating those negative effects will take time, even if the conflict were to stop soon.
“So the gas, for example, for Qatar will take five to six weeks to be restored and it will not be a full production because they had damage to some of it,” he said. And now you have time to transport products from A to B.
Mr MacAllister said there were signs of supply chains trying to adapt to the new reality – meanwhile Irish companies were increasingly turning to action plans to try to reduce the impact the conflict had on their operations.
“Some of them have a product that is still stable but they are still working on that depending on where they will take the product to or from,” he said. “The balance is trying to figure out what kind of conditions people are looking at over the next few months.
“So what kind of duration can this conflict have and then, if there is a solution, how long will that solution last. From there you can start to think about the possible conditions of the price of energy and the problems of the type of shortage that different companies will face.”
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