Investors brace for oil price spike after Iran attack
The US attack on Iranian nuclear sites could lead to a knee-jerk reaction in global markets when they reopen, sending oil prices higher and triggering a rush to safety, investors say as they assess how the latest escalation of tensions will ripple through the global economy.
The attack, announced by President Donald Trump on social media site Truth Social, deepens US involvement in the Middle East conflict.
That was the question going into the weekend, when investors were mulling a host of different market scenarios.
In the immediate aftermath of the announcement, they expected the US involvement was likely to cause a sell-off in equities and a possible bid for the dollar and other safe-haven assets when trading began, but also said much uncertainty about the course of the conflict remained.
"I think the markets are going to be initially alarmed, and I think oil will open higher," said Mark Spindel, chief investment officer at Potomac River Capital.
"We don't have any damage assessment and that will take some time.
"Even though he has described this as 'done', we're engaged. What comes next?" Spindel said.
"I think the uncertainty is going to blanket the markets, as now Americans everywhere are going to be exposed. It's going to raise uncertainty and volatility, particularly in oil."
Spindel, however, said there was time to digest the news before markets opened.
A key concern for markets would centre around the potential impact of the developments in the Middle East on oil prices and thus on inflation.
A rise in inflation could dampen consumer confidence and lessen the chance of near-term US interest rate cuts.
"This adds a complicated new layer of risk that we'll have to consider and pay attention to," said Jack Ablin, chief investment officer of Cresset Capital.
"This is definitely going to have an impact on energy prices and potentially on inflation as well."
While global benchmark Brent crude futures have risen as much as 18 per cent since June 10, hitting an almost five-month high of $US79.04 ($A121.82) on Thursday, the S&P 500 has been little changed, following an initial drop when Israel launched its attacks on Iran on June 13.
Before the US attack on Saturday, analysts at Oxford Economics modelled three scenarios, including a de-escalation of the conflict, a complete shutdown in Iranian oil production and a closure of the Strait of Hormuz, "each with increasingly large impacts on global oil prices".
In the most severe case, global oil prices jump to about $US130 ($A200) per barrel, driving US inflation close to six per cent by the end of 2025, Oxford said in the note.
"Although the price shock inevitably dampens consumer spending because of the hit to real incomes, the scale of the rise in inflation and concerns about the potential for second-round inflation effects likely ruin any chance of rate cuts in the US this year," Oxford said in the note, published before the US strikes.
Economists warn a dramatic rise in oil prices could damage a global economy already strained by Trump's tariffs.
An escalation in the conflict could have mixed implications for the US dollar, which has tumbled amid worries over diminished US exceptionalism.
In the event of US direct engagement in the Iran-Israel war, the dollar could initially benefit from a safety bid, analysts said.
"Do we see a flight to safety? That would signal yields going lower and the dollar getting stronger," said Steve Sosnick, chief market strategist at IBKR in Greenwich, Connecticut.
"It's hard to imagine stocks not reacting negatively and the question is how much. It will depend on Iranian reaction and whether oil prices spike."
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