North American stocks recovered from an early dip in the first day of trading since the United States and Israel launched attacks against Iran over the weekend.
But rising gold and oil prices, as well as a move into the safety of the U.S. dollar, suggested some investor anxiety over how long the conflict will last and whether it could spread beyond Iran.
The S&P 500 on Monday closed at 6,881.62, up 2.71 points or roughly even on a percentage basis, after rebounding from a steeper 1.2-per-cent decline at the start of trading.
In Canada, the S&P/TSX Composite Index closed at 34,541.27, up 0.6 per cent.
But beneath the relatively calm surface are several wild market gyrations, reflecting simmering concerns about trade, inflation and monetary policy when equity valuations are stretched.
Oil prices surge in response to Middle East conflict
Overseas, Britain’s FTSE 100 fell 1.2 per cent, Germany’s DAX fell 2.4 per cent and Japan’s Nikkei 225 fell 1.4 per cent, suggesting concerns about their sensitivity to disrupted energy markets.
The price of crude oil jumped 8 per cent, to US$72.38 a barrel, amid threatened exports from the Middle East.
Gold, which is often viewed as a safe haven investment when geopolitical risks are rising, rose to US$5,311.60 an ounce, up US$63.70 – though still shy of its record in late January.
The U.S. dollar index, which measures the dollar’s strength against a basket of global currencies, rose 1 per cent, also suggesting that investors are seeking safety from a conflict that could stretch for several weeks or more.
“All told, we presume a shorter-term impact, but can’t rule out a more protracted friction to equities,” Scott Chronert, North American head of research at Citigroup, said in a note.
Still, some observers argued that Monday’s relatively muted overall response to the conflict shouldn’t come as a surprise, given the economic resilience to rising energy prices.
Insurance companies are canceling war risk coverage for vessels in the Gulf as the widening Iran conflict disrupted shipping, leaving at least four tankers damaged around the Strait of Hormuz.
Reuters
In Europe, the increase – if it lasts – would add just 0.3 percentage points to inflation and merely make interest-rate cuts by the European Central Bank less likely, according to Andrew Kenningham and Jack Allen-Reynolds, economists at Capital Economics.
“The increases in energy prices so far would not be a game-changer,” the economists said in a note.
In the United States, where oil production has surged in recent years, rising oil prices can boost dividend-investing strategies and stocks in the industrials sector, according to Emily Roland, chief investment strategist at Manulife John Hancock Investments.
But the broader economic impact of expensive oil, she added, should be relatively limited given that the dependency on oil has diminished significantly with fuel alternatives and greater efficiency.
Ed Yardeni, head of Yardeni Research, can even see a bullish lining to the current conflict if it ends relatively quickly.
“If oil prices drop in the coming weeks following a ceasefire, U.S. inflation and gasoline prices will decline, boosting U.S. consumer spending and benefiting global economies and stock markets,” Mr. Yardeni said in a note.
Investors are shrugging off oil-shock risk too easily
This upbeat outlook is not out of line with market reactions to previous military conflicts.
After eight major conflicts over the past 36 years – including the Gulf War in 1990, the invasion of Iraq in 2003 and the Russian invasion of Ukraine in 2022 – the S&P 500 typically was down by an average of just 0.37 per cent within a week, according to Cresset Capital Management, a U.S.-based investment firm.
Within three months of the start of a conflict, the S&P 500 was up 3.6 per cent, on average.
“History shows that U.S. equity markets have often demonstrated resilience following military events,” Mike Silverman, chief investment officer at Cresset, said in a note on Monday.
Mr. Chronert, the Citigroup strategist, put the current conflict into a basket of market threats, which include new leadership at the Federal Reserve and the economic impact of artificial intelligence. As of Sunday, the attack on Iran didn’t crack the top spot, in his view.
“We are probably more concerned about longer-term AI-influenced deflation than military conflict influence on oil price and inflation,” Mr. Chronert said in his note.