Can markets contain the fallout from geopolitical escalation?
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Following the airstrike carried out by Israel inside Iranian territory, which the Israeli Defense Minister described as a "preemptive strike," global markets face a critical challenge: will they succeed in containing the fallout from this sudden geopolitical escalation?
These tensions immediately cast a shadow over market indicators, as oil prices rose, Asian stocks and U.S. stock futures fell, and the dollar began to recover its previous losses as investors increasingly leaned towards abandoning high-risk assets.
The coming hours will determine the market's fate: scenarios for the Iranian response
Analysts see that the next few days will be crucial in determining market direction. Headlines regarding the Israeli strike have reignited geopolitical fears, and the continuation of this cautious mood depends on the nature of Tehran's response in the next 24 to 48 hours.
Scenario One: Limited containment
If the Iranian response is limited and energy flows continue uninterrupted, historical experience suggests that the risk wave may dissipate quickly. In such cases, markets tend to absorb initial shocks and return to their fundamental path.
Scenario Two: Escalation and volatility.
Conversely, any indication of significant retaliatory action from Iran or disruptions in oil and gas supplies will keep volatility levels high. This scenario would push oil prices and safe assets like gold and U.S. Treasury bonds further up, with a notable decline in high-risk assets such as stocks and cryptocurrencies.
A sudden shift in market mood: from optimism to caution
The Israeli strike marked a sharp shift in market mood, which had been optimistic the night before the attack. Optimism regarding the tech sector and declining inflation was driving the market toward risk, but the direct strike on Iran turned this narrative upside down.
This scenario recalls previous flashpoints such as the assassination of Qassem Soleimani in 2020 and the tanker attacks in 2019, where markets exhibited similar initial reactions of rising oil prices and strength in U.S. Treasury bonds and the Swiss franc.
The key now is how well these developments are contained; history shows that shock often fades if escalation is limited.
Investments are shifting towards safe havens: key indicators
Markets are closely watching for any additional signs of escalating tensions, which drives investors eagerly towards safe-haven assets. This risk-averse behavior means:
The Japanese yen and U.S. Treasury bonds: are expected to continue attracting buying flows.
High-risk assets: may see a noticeable decline as investors move away from them.
Gold: is a key indicator for hedging against geopolitical risks and potential inflation, and will continue to maintain its appeal.
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Oil: its movements remain directly linked to supply expectations from the region, and any threat to the Strait will lead to further increases.