Stock markets are deluded to think the latest threat to the global economy has been removedFollowing the US assassination of Iranian al-Quds commander Qassem Suleimani and Iranīs initial retaliation against two Iraqi bases housing US troops, financial markets moved into risk-off mode: oil prices spiked by 10%, US and global equities dropped by a few percentage points and safe-haven bond yields fell. In short order, though, despite the continuing risks of a US-Iran conflict and the implications that it would have for markets, the view that both sides would eschew further escalation calmed investors and reversed these price movements, with equities even approaching new highs.That turnabout reflects two assumptions. First, markets are banking on the fact that neither Iran nor the US wants a full-scale war, which would threaten both the Iranian regime and Donald Trumpīs re-election prospects. Second, investors seem to believe that the economic impact of a conflict would be modest. After all, oilīs importance as an input in production and consumption has fallen sharply since past oil-shock episodes, such as the 1973 Yom Kippur war, Iranīs 1979 Islamic revolution and Iraqīs 1990 invasion of Kuwait. Moreover, the US itself is now a major energy producer, inflation expectations are much lower than in past decades, and there is little risk of central banks raising interest rates following an oil-price shock. Related: Crisis for Iran may present an opportunity for Washington Continue reading...
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