How could Iran’s attack on Israel affect markets?

by | Apr 15, 2024

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Analysis from John Plassard, senior investment specialist at Mirabaud Group, into how Saturday night’s attack by Iran on Israel might affect markets particularly with regards to possible further escalation of this increasingly dangerous situation within the Middle East

Iran launched a major air attack against Israel and the territory it controls late on Saturday, firing several hundred drones and missiles. It was the first direct attack of this kind launched from Iranian territory after decades of shadow warfare between the two countries. The assault was launched in response to a recent attack on a building in the Iranian embassy complex in Syria, which killed several senior Iranian officials. The question now arises as to what the economic consequences of more direct Iranian involvement might be.

The facts

Iran launched a large-scale air strike against Israel on Saturday night. It was the first direct strike from Tehran against Israel after years of tension. No one was killed in the attack, but 12 people were taken to the Soroka medical centre in southern Israel overnight. The Nevatim air base, located in the Negev desert in southern Israel, was reportedly slightly damaged by the attack, but is said to be operational.

 
 

Tehran said the attack was in retaliation for an attack it blamed on Israel against the Iranian consulate in the Syrian capital Damascus earlier this month. Several members of Iran’s Islamic Revolutionary Guard Corps were killed in the attack. Israel has neither claimed nor denied responsibility.

Iran and Israel have been waging a clandestine war for decades, attacking each other’s interests on land, at sea, in the air and in cyberspace.

Iran (purportedly) supports proxy forces such as Hezbollah in Lebanon, Hamas in the West Bank and Gaza and the Houthis in Yemen.

 
 

Israel has repeatedly attacked Iran, including killing the country’s top nuclear scientist, Mohsen Fakhrizadeh, in 2021, and assassinating a Revolutionary Guard commander, Colonel Sayad Khodayee, in 2022.

Tensions have soared in the region following six months of brutal warfare between Israel and Hamas, the Palestinian militant group backed (unofficially) by Iran, triggered by the latter’s attacks on 7 October last year. Rear Admiral Daniel Hagari of the Israel Defence Forces (IDF) described Saturday’s barrage as a “major escalation”.

Iran, a long-standing enemy of Israel, has always used proxies to carry out its interventions, hence the interest in groups allied to it in the Middle East. This time the situation is different, because it’s historic.

 
 

While Iran has the capacity to launch missiles at Israel (as did Saddam Hussein’s Iraq during the first Gulf War), the pre-positioning of American and other Western allied naval assets in the region in recent days seemed designed to signal what could be the consequences of Iranian intervention.

The information provided by foreign intelligence services proved once again to be accurate.

Global involvement

 
 

Iran’s Permanent Mission to the United Nations stated in a message posted on social media last night that “the matter can be deemed concluded”. However, if the Israeli regime makes another mistake, Iran’s response will be considerably harsher.

For its part, the US government, in the hope of avoiding further escalation, reportedly informed Israel that its defence against the Iranian attack was a major victory that might not require a new round of retaliation, as the NY Times points out.

But the Israeli government will be under pressure to respond to the attack, and Israeli Defence Minister Yoav Gallant has said that the confrontation with Iran is “not yet over”.

 
 

In addition, the recent intensity of Houthi attacks is causing many warships to leave the Red Sea. The French Aquitaine-class frigate FREMM Alsace, for example, left the Red Sea short of missiles and ammunition to repel attacks by the Yemeni armed forces, according to its commander, Jérôme Henry.

“We didn’t necessarily expect this level of threat. There has been an outright violence that has been very surprising and very significant. [The Yemenis do not hesitate to use drones that fly low over the water, to explode them on commercial ships and to fire ballistic missiles”, Henry told Le Figaro.

What are the economic impacts?

 
 

The conflict between Israel and Hamas has major repercussions for the global economy, especially if Iran becomes more directly involved. Here are a few key points:

  • Energy prices: Iran’s role in the conflict is crucial, as it controls the Strait of Hormuz, a critical sea passage through which some 20%-30% of the world’s oil supplies pass. If the conflict escalates and affects major oil-producing countries like Iran, energy costs for businesses and households could soar due to supply disruptions. Rising energy prices would hamper central banks’ efforts to manage inflationary pressures around the world.
  • Global trade tensions: Any disruption to oil supplies could exacerbate existing global trade tensions. Companies heavily dependent on energy resources could face difficulties, impacting supply chains and production costs.
  • Hezbollah and Hamas: If Hezbollah continues to feel threatened by Israel, a deeper involvement of Iran in the conflict could become a possibility. Such a scenario could lead to a catastrophic economic event. In short, Iran’s involvement in the conflict between Israel and Hamas could affect energy markets, world trade, inflation dynamics and the geopolitical situation.

Which assets should be monitored?

Iran’s involvement in the current conflict between Israel and Hamas could have an impact on various assets and markets. Here are some of the areas likely to be affected:

 
 
  • The price of oil: Iran controls the Strait of Hormuz, an essential maritime passage for the transport of oil. Any escalation involving Iran could disrupt oil supplies, leading to a rise in global energy prices. The price of oil rose sharply on Friday on rumours of intervention this weekend, before deflating somewhat. The uptrend is set to continue.
  • Commodity markets: Depending on the region concerned, other commodities may also experience a degree of volatility due to geopolitical tensions.
  • Gold: Investors often view gold as a safe haven in times of market volatility. If the conflict intensifies, demand for gold could rise. Gold hit a new all-time high on Friday.
  • Bitcoin: Bitcoin and other cryptocurrencies fell sharply after Iran’s attack on Israel. The price of bitcoin plummeted from around $67,000 to $61,625, wiping out more than $130 million in market capitalisation in the minutes following the attack, before recovering. Let’s remember here that recent history has shown us that cryptocurrencies act like risky assets.
  • Defence and aerospace stocks: Companies active in the defence and aerospace sectors could attract increased interest. Israel’s successful defence against Iran’s attack could boost confidence in its military capabilities, which could benefit related stocks.
  • Currencies: The conflict may have an impact on exchange rates, particularly for the currencies of the countries directly involved or those with major interests in the region. Safe-haven currencies such as the CHF and USD are also likely to be affected.
  • Regional stock markets: Stock markets in the Middle East, particularly Israel and neighbouring countries, could fluctuate in line with geopolitical developments. On the other hand, markets such as Switzerland (SMI), which are considered to be more defensive, could benefit.
  • Volatility: Volatility, which has seemed “dead” since November 2023, has just woken up. The VIX (fear index) has just exceeded 17 for the first time since October 2023 and could continue to rise in the event of Israeli reprisals against Iran following this weekend’s attacks.

Last but not least, there is the geopolitical risk premium. Investors may demand a higher risk premium for assets in the region because of geopolitical uncertainty and tensions. In short, in the event of Iran’s involvement (or continued involvement), many assets could be affected.

Conclusion

Today, it is possible that any response will not include a large-scale attack on Iranian territory itself, thus limiting the chances of further escalation. Historically, the Islamic Republic has had no appetite for even low-intensity friction that could lead to direct conflict with its adversaries. A regional conflagration would risk not only damaging its network of influence, but also weakening the Islamic regime itself, to the point of calling its existence into question. These risks, of which the Iranian leaders are perfectly aware, could explain Iran’s “restraint”, which naturally includes the issue of the country’s nuclear programme.

 
 

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