Rather than spiking Middle East geopolitics, global financial markets have been surprisingly resilient to recent United States strikes on Iran.Â
Far from inducing general panic or even large sell-offs, investor response has been muted, demonstrating confidence that fighting would be contained and not systemically risk-creating to global commerce or financial stability.
As Asian trade commenced, the MSCI World Index lost 0.12 percent, suggesting investors do not anticipate widespread global contagion. Safe-haven assets, however, sent out conflicting signals: the Japanese yen dropped 0.64 percent versus the U.S. currency, gold fell 0.23 percent to settle at $3,360 an ounce, and the U.S. dollar index gained 0.35 percent.
This muted response is light-years away from responses so far to Middle East tensions, particularly after Israel bombed Iran last week. Analysts now perceive investors as viewing the U.S. move as a move of containment, not escalation. The market views the attack as an action that reduced the risk of nuclear escalation in the Middle East and, therefore, geopolitical risk in general, Wedbush Managing Director Dan Ives says.
While the air is heavy, most market watchers do not see what is transpiring as a broad risk to economic stability in the world. US President Donald Trump has already confirmed that American soldiers attacked Iranian nuclear sites, and that has provided fuel for speculations about what Tehran will hit back. Though Iranian authorities have threatened potential retaliation, such as a parliamentary order to shut down the Strait of Hormuz, a top oil trading artery globally, most observers do not expect it.
Approximately 20 million barrels of petroleum products and oil pass through the Strait of Hormuz daily. The closure would have devastating and immediate implications for global energy markets. History, however, demands that Iran’s threats to close the strait are more threats than capabilities to act. Iran threatened to close the strait in 2011, 2012, and again, most recently, when the U.S. withdrew from the nuclear deal in 2018 but took no action.
Bleakley Financial Group’s Peter Boockvar referenced Iran’s reaction as the biggest variable. If Iran backs down, the crisis will be over soon. But if Tehran attempts to close down the Strait or attack U.S. assets directly, world markets would collapse in the blink of an eye. Then oil would surge to more than $100 a barrel, equities would fall by more than 10 percent, and money would flow into safe-haven assets.
Marko Papic, chief strategist for GeoMacro Strategy, guessed that Iran’s ability to retaliate materially is low. He argued that Iran is smart enough not to strike America in its military avatar, primarily by destroying strategic worldwide supply lines like the Strait of Hormuz. He went further to add that retaliation would be quick and would be brutal, deterring Tehran from taking action.
Even grizzled market tactician Ed Yardeni is optimistic. He thinks U.S. military action supports American deterrence and geopolitical stability. Yardeni still likes to maintain a good bull thesis on U.S. stocks, forecasting the S&P 500 to reach 6,500 in 2025. He went on to argue that Middle Eastern politics can never be predicted with complete certainty, but that the destruction of Iranian nuclear facilities could energize a broader regional revolt.
In previous experience, a subdued market reaction would indicate a generalized perception that this geopolitical hot spot, as bad as it is, isn’t yet hurtling into outright crisis. For now, at least, financial markets are watching intently, without panic. Investors appear to be betting on diplomacy, deterrence, and graduated military involvement to contain this war without upsetting world markets.
