Oil prices have increased dramatically as have stock market volatility, indicating that there is still a large degree of uncertainty in the market among investors.
Price Increases of Oil and Supply Disruptions
One of the first casualties of the conflict affecting the global economy has been the oil markets; Brent and WTI prices have both experienced price increases on a regular basis and we are seeing greater fears of interruptions to supply from the Middle East.
The Strait of Hormuz is without a doubt the focus of all concerns and any disruption in that corridor would have a significant impact on the global supply of oil which would, in turn, send oil prices much higher.
Effect On Global Inflation
Higher oil prices will lead to higher worldwide inflation. One of the largest contributing factors to inflation before was higher energy prices due to their impact on transportation costs, manufacturing and ultimately on retail.
If oil prices continue to increase, central banks are under significant pressure to keep interest rates higher which could ultimately slow the rate of economic growth in countries throughout the world.
Stock Market Performance
U.S. futures have continued to show a slight gain, but overall, there continues to be an air of uncertainty and fragility in the markets across the globe due to the geopolitical situation. As is typical, prolonged geopolitical conflicts negatively impact stock markets, especially when the conflict extends to include other nations.
Rising oil prices are helping support the energy sector’s performance in terms of activity and profits; therefore they continue to be one of the few segments of the economy that appears to have some strength at this time.
Looking Forward
The next step will depend on the evolution of the ongoing Iranian conflict. Some of the things you should keep an eye on as you watch for changes in the marketplace are as follows:
Any new developments regarding escalation/de-escalation in the ongoing war
Changes in production or movement of oil from production to end-users
Central bank actions to combat the effects of rising inflation
Changes in investor confidence in international public equity securities
The ongoing Iranian conflict remains one of the primary influences on the financial markets at a global level due to heightened inflationary pressures from rising oil prices, and uncertainty with regard to investor confidence and the global economy. Any continued escalation of the Iranian conflict could mean more challenges for the global economy, including slower growth and greater volatility; for now however the markets remain very sensitive to any geopolitical events as they continue to unfold.