[SINGAPORE] Markets reacted in a more muted manner than expected on Monday (Jun 23) after the US launched strikes against three nuclear facilities in Iran over the weekend.
But analysts warned that there could be more volatility ahead as the world awaits Iran’s reaction.
US President Donald Trump announced strikes against three Iranian nuclear facilities on Sunday (Jun 22), boosting Israel’s efforts to destroy Iran’s nuclear programme. This followed more than a week of Israeli air attacks on Iran’s nuclear and military facilities and the US’ attempts to persuade Iran to reach a deal to dismantle its nuclear programme.
In response, Iran threatened US bases in the Middle East, intensifying concerns over a deepening of conflict in the region.
Markets in the Asia-Pacific tumbled slightly initially, but by Monday’s close, had recovered most of their losses – a reaction that was not as severe as when Israel first launched attacks. US futures rose marginally ahead of Monday’s trading session.
Hong Kong’s Hang Seng Index closed up 0.7 per cent after earlier losses; on the mainland, the CSI 300 Index ended 0.3 per cent higher.
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Japan’s Nikkei 225 ended Monday’s session around 0.1 per cent lower, and South Korea’s Kospi closed 0.2 per cent down. Australia’s ASX closed nearly 0.4 per cent lower.
Oil prices gained initially, but were soon pared back. On Monday afternoon, they were still at levels higher than before the Jun 13 Israel attacks, with West Texas Intermediate (WTI) at a gain of around 8 per cent, and Brent at 10 per cent higher.
Oil markets
The spike in oil prices may have faded slightly somewhat intraday on Monday, but the broader trend reflects building pressure on global energy supply chains, said Charu Chanana, chief investment strategist at Saxo.
“Even without a direct shutdown of the Strait of Hormuz, higher shipping costs and insurance premiums could lift energy prices in a more sustained way,” she said. The Strait of Hormuz is a major trading route through which around a fifth of global oil and gas flows.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, also noted that it takes a number of days to a few weeks to meaningfully disrupt global oil flows.
“A weakened Iran, if left with no other options, could still go down that road,” she cautioned.
A sustainable jump in oil prices – to around US$100 a barrel for a few months – could have wider implications for the global economy by boosting inflation and preventing central banks from further easing; this would, in turn, weigh on production, business activity and growth, Ozkardeskaya said.
OCBC’s Vasu Menon said that, historically, past Middle East flashpoints may have caused oil prices to spike initially, but eventually failed to produce a lasting market reaction, partly because the feared impact and disruption to oil supply did not materialise.
Equity and overall markets
Menon, the bank’s managing director of investment strategy and wealth management in Singapore, noted that Middle East markets ended mostly higher on Sunday, despite the US attack on Iran.
“The unfazed response from Middle East markets offers hope that the fallout for other global markets may not be dramatic … they may not be down and out, and the response may be temporary, and a rebound could materialise eventually,” he said of global markets.
Swissquote Bank’s Ozkardeskaya noted it was “extremely interesting” to note that S&P 500 futures were “behaving like a normal Monday”. “It really feels like markets have become increasingly unreactive to the news.”
Menon added: “A lot hinges on what Iran will do next, and whether it would sabotage oil supply in the Middle East in retaliation for the US attack. We will have to wait and watch over the next few days, or even a few weeks, to see how Iran responds.
“This may keep investors nervous and markets volatile in the short term, but may not be a game changer for markets. Of greater consequence to the markets may be the reciprocal tariffs that Trump will decide on by Jul 9,” he said.
However, Menon urged investors to prepare for more volatility in the coming days and weeks.
Saxo’s Chanana said that markets now face “overlapping risks”: energy disruption, inflation shock, delayed rate cuts and rising global macro uncertainty. Rising inflation caused by energy disruptions could delay rate cuts by the inflation-sensitive US Fed.
“Trump’s abrupt pivot from ‘wait and see’ to launching strikes reinforces a sense of strategic instability. For businesses and investors, it raises the bar for deploying long-term capital with confidence,” she said. “While the market’s initial reaction appears contained, investors should be cautious about becoming complacent.”
But Menon said that these developments “may not end the global equity bull market” if they don’t result in sharply higher inflation.
Markets have been very resilient this year, he pointed out, despite tariff shocks and geopolitical risks. “What’s going for markets is a lot of idle liquidity on the sidelines that could provide market support, should there be sharp pullbacks.”
Gold
One bright spot: Gold.
Menon said that the scope for safe havens such as gold to continue rising is likely to stay.
This comes as global uncertainties continue, while global central banks proceed with diversifying away from their US dollar holdings towards gold.
“We see gold rising to US$3,900 per ounce over a 12-month horizon,” he said.
Gold’s classic hedge qualities may, however, come under the scanner if yields rise or the US dollar strengthens significantly, cautioned Chanana.
To her, gold miners and defence contractors stand to gain more attention if tensions from the conflict escalate further.
“These sectors have historically been sought out during geopolitical flare-ups and rising inflation concerns, and offer resilience in the face of volatility, especially if portfolios have more relative cyclical exposure to, say, tech or consumer discretionary,” said the Saxo analyst.
