What it would take for the stock market to really start to worry about geopolitics

CNBC

2 days ago

Equity and energy markets appeared to shake off concerns of a wider conflict in the Middle East on Monday, reversing some of the moves from late last week and suggesting that it may take significant military escalation to cause a more lasting sell-off. Traders who look beyond geopolitical issues are not unusual, and this conflict has yet to create the type of damage that has hurt markets in the past, said Henry Allen, London-based macro strategist at Deutsche Bank. "Historically, it's only been when it's affected macro variables like growth and inflation. So for markets, the geopolitical events that mattered were the stagflation shocks, like the 1970s oil crises, the Gulf War in 1990 and Russia's invasion of Ukraine in 2022. Today, we haven't seen a shock on that scale so far," Allen wrote in a report to clients. West Texas Intermediate crude futures briefly traded above $77 per barrel on Friday but were below $72 on Monday afternoon. The global benchmark for oil prices, Brent crude, is still trading below its average price in 2024, Allen noted. @CL.1 5D mountain Oil futures have retreated from their Friday highs. In a separate note, another strategist at Deutsche Bank said that the equity market's current set-up could make it even more resilient than the historical data shows. "Historically, the S & P 500 tends to fall around -6% in the three weeks following a geopolitical shock, only to recover fully over the subsequent three weeks," Jim Reid, the bank's global head of its fundamental credit strategy group, wrote. "Our strategists argue that the bar for a more significant sell-off is higher this time, as equity positioning is already quite light." The moves on Monday came as Iran and Israel continued to attack one another. NBC News , however, reported that Iran was asking other Middle East nations to push President Donald Trump to press Israel for a ceasefire in exchange for flexibility on nuclear talks. To be sure, the conflict between Iran and Israel would focus investor attention more if it drives up inflation by disrupting the oil market. "Although equity markets have historically proven quite resilient to geopolitical events — in 60% of the major events since 1940, U.S. equities were up in the subsequent three months — the main exception has been when there was an oil price shock," according to Alastair Pinder, head of emerging markets and global equity strategist at HSBC Global Research. "In such instances, global equities fell 8% over the next two months," he said in a note to clients. Inflation remains near top of mind for investors, as major data series still show that the annual rate of price increases remains above the Federal Reserve's 2% target. Wall Street will get an updated look at how the central bank views inflation on Wednesday, when a new policy statement and economic projections are released.