Geopolitical Tensions Cause Brief 5.7% Oil Spike, Markets Remain Calm

Morgan Stanley strategist Wilson noted that geopolitical events, such as the recent U.S. strike on Iran's nuclear facilities, typically result in brief sell-offs in global markets. Despite the significant headlines, these sell-offs usually have a short duration. Following the U.S. and Israel's weekend attack, the market reaction was relatively muted, with Brent crude oil prices briefly spiking by 5.7% before giving back most of the gains on Monday. However, there is a possibility that Iran may respond by disrupting the navigation of the Strait of Hormuz, a critical global shipping lane for oil and natural gas.

Historically, geopolitical tensions, particularly those from conflicts in the Middle East, have led to brief but significant sell-offs in global markets. According to Morgan Stanley strategists, these geopolitically driven sell-offs typically fade quickly, allowing markets to stabilize and recover. This perspective is supported by the observation that recent geopolitical events, such as the U.S. strikes on Iran, have not led to prolonged market volatility.

The strategists noted that while initial reactions to geopolitical events can be dramatic, the impact on global markets is often short-lived. This is because investors generally expect conflicts to be localized and not have a broader impact on the global economy. For instance, despite the U.S. strikes on Iran, the S&P 500 Index has only seen a modest decline, and the dollar has strengthened by less than 1% since the June 13 attack. This suggests that investors are not overly concerned about the potential for a broader conflict.

The strategists also pointed out that a quick resolution to the conflict could bring oil prices down to $60 per barrel, which would further stabilize markets. However, ongoing tensions could keep oil prices within the current range, potentially leading to a short squeeze on the dollar. Despite this, the fundamentals still indicate that the dollar's strength is fading, largely due to Trump's trade and fiscal policies.

Market observers have also noted that the downside may be limited as some market participants have already prepared for a worsening conflict. Since June 13, the MSCI Global Index has fallen by 1.5%, and fund managers have reduced their holdings in stocks, meaning the likelihood of significant sell-offs at these levels is lower. This preparation has helped to mitigate the impact of geopolitical tensions on global markets.

In summary, while geopolitical events can lead to brief sell-offs, the impact on global markets is often short-lived. Investors generally expect conflicts to be localized, and a quick resolution could bring oil prices down, further stabilizing markets. The downside may be limited as market participants have already prepared for a worsening conflict, and the fundamentals still indicate that the dollar's strength is fading.