Breakingviews - Markets' Gulf composure fits a wider pattern
LONDON, June 23 (Reuters Breakingviews) - Investors don't seem that bothered about the United States' dramatic intervention in Israel's war with Iran. Despite President Donald Trump's decision to bomb three of the Islamic Republic's nuclear facilities over the weekend, asset prices hardly budged. History does suggest geopolitical flashpoints aren't always long-term headaches for investors – but the data doesn't conclusively prove they've made the right call.
On Monday morning, the STOXX 600 declined 0.1%, meaning the European equity benchmark is only down around 2.5% since Israeli attacks on June 13. German and Saudi 10-year bond yields rose marginally. The U.S. S&P 500 was also due to drop only 0.1% on opening, according to futures prices collected by LSEG. And Brent oil contracts for August delivery rose just 0.6% to trade at $77 a barrel, admittedly above the $66 level seen earlier this month, but hardly pricing in major disruptions.
This all seems highly premature. While Trump called on Sunday for peace following what could reasonably be seen as an act of war, he continues to post on social media about the possibility of Iranian regime change. Iran's parliament has already approved actions to block the Strait of Hormuz, through which 20% of the world's daily oil supply passes. As such, markets should be braced for further escalation, not less.
One explanation might be that investors know that geopolitical storms are often just squalls. A JPMorgan study, opens new tab of 36 different political and martial flashpoints between Germany's invasion of France in 1940 and Russia's invasion of Ukraine in 2022 found that the S&P 500 returned 0.3% in the three months afterwards, against 1.3% over the same period in calmer times. But over six months the returns were the same.
Oil-related shocks are, admittedly, different. The 1990 Gulf War saw the S&P 500 drop 20% in the two months after Iraq's invasion of Kuwait in August, although it recovered these losses by February 1991. But after the five-month Arab oil embargo in 1973, the S&P was still lower five years later.
Investors' sangfroid may reflect confidence that Trump's attacks are a run-of-the-mill geopolitical squall. More likely, they see the latest crisis as a potential oil shock, but one that the U.S. can easily contain. There's some logic in that: even if Iran tries to block Hormuz, a move its Supreme National Security Council still needs to approve, the U.S. Fifth Fleet in Bahrain might stop it. Meanwhile, restricting oil exports would hurt Tehran too.
Yet the geopolitical received wisdom could easily be wrong, especially if a cornered Iranian regime starts to fear that Trump and Israel will push to replace it, and resorts to drastic measures. In that scenario, markets' relative calm might still quickly turn to panic.
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