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A new threat to the stock market

07.04.2024 21:00 3 min reading
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A new threat to the stock market

Investors have appeared unconcerned about geopolitical risks over the past year. However, that sentiment changed Thursday afternoon in New York, according to analysts at Bespoke Investment Group.

They attributed the sudden reversal in stocks to speculation that Israel could face a military strike from Iran, especially after Israel destroyed the Iranian consulate in Syria earlier in the week, sending crude oil prices soaring.

Some market analysts are now warning that escalating tensions in the Middle East could have a bigger impact on stocks than a possible delay in Fed rate cuts. Steve Sosnick, chief market strategist at Interactive Brokers, noted that stock investors often ignore geopolitical risks until they suddenly become visible, leading to possible overreactions.

Although US equity markets rallied on Friday, they fell sharply on Thursday afternoon, with the Dow Jones Industrial Average plunging 530 points, its biggest daily drop in more than a year.

Despite comments from Minneapolis Federal Reserve Bank President Neil Kashkari that suggested a possible delay in interest rate adjustments until next year, Treasury yields reacted differently on Thursday and Friday. According to Bespoke, the muted reaction in bond yields indicated that concerns about a potential escalation between Iran and Israel were the main driver of the stock market sell-off, rather than a shift in interest rate expectations.

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The stock market's sudden reaction to tensions between Iran and Israel, six months after the start of the conflict between Israel and Hamas, raises questions. Initial market reactions to the conflict were minimal, with the S&P 500 even finishing higher on some days following the significant events. Savita Subramanian, head of US equities and quantitative strategies at BofA Global Research, suggests that investors often ignore geopolitical events unless they have a direct impact on corporate earnings and the underlying economy.

While major geopolitical events such as the 11/XNUMX terrorist attacks and Brexit had only a short-lived impact on markets, any wider conflict in the Middle East involving Israel and Iran could have significant economic consequences. This could include a spike in crude oil prices, a disruption in global trade, reduced demand for overseas travel and weakened consumer spending in Europe, potentially extending the decline in markets.

Despite the potential negative impacts, some sectors such as defense and aerospace could benefit from the heightened tensions, along with energy companies experiencing gains from higher crude oil prices.

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Ed Yardeni, president and chief market strategist at Yardeni Research, has consistently cautioned against underestimating the risks of conflict in the Middle East. He stressed that current tensions could escalate into a wider conflict, which would significantly affect market performance in the long term.

In summary, while US stocks closed higher on Friday, concerns over escalating tensions between Israel and Iran remain on the agenda, with geopolitical risks posing a significant threat to market stability and likely outweighing concerns about the Fed's interest rate decisions. percent by the end of the year.

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