The tentacles of the Middle East unrest reach far and wide, particularly in Asia and Europe, which tend to be net importers of energy. Japan’s reliance on imported oil, for example, has led to a decline of 9% for the Nikkei 225 since the outbreak, undoing much of the progress that the main index had been making this year, testing record highs on several occasions.
Some vague buying interest across property-related stocks, an upbeat production update from Rio Tinto, and an inevitable further bump for the oil majors were offset by a broader markdown across sectors, including but not limited to the banks and airlines. As a result, the struggled to make any meaningful progress and, despite remaining ahead by just 0.5% in the year to date and therefore outperforming many of its global peers, visibility for prospects remains unclear.
There is a growing feeling on both sides of the pond that markets are becoming something of a coiled spring, awaiting a truce which would energise investors and indices alike. By the same token, as long as the conflict continues to escalate and the ramifications become more serious for the global economy, investors are most likely to keep their powder dry.
Meanwhile, White House rhetoric is now falling on deaf ears, and only signs of concrete actions are likely to arrest the slide across most asset classes.
While the has seen some strength from haven-seekers, it is oil that remains centre stage. Attacks in the Gulf continued over the weekend, with a new layer of risk emerging as Yemen’s Houthis entered the fray, which could restrict shipping in the Red Sea, adding another choke point to oil supplies. This in turn allowed oil to resume its ascent, with the price now 58% higher since the beginning of the conflict and up by 89% in the year to date.
Duration has been the main concern since the first few days of the conflict, and reports of US troops in the region edging nearer to 50000 implied that a ground invasion could be imminent, despite the President’s protestations otherwise and more in line with the flat denials emanating from Iran.
As the war lingers, the cost and time of reversing the damage will increase, likely meaning that the oil price could remain elevated for a longer period of time, increasingly inflationary pressure globally.
The more growth and technology-focused has taken the brunt of the investment flight to safety, and is now down by 9.9% in the year so far, with the likes of Nvidia (NASDAQ:) down by 11% and Microsoft (NASDAQ:) by 25%, showing the extent of investor concern.
At the end of last week, the Dow joined the Nasdaq in correction territory, and the is not far behind, having fallen by almost 9% from its recent peak. In the year to date, the and benchmark S&P 500 are now nursing losses of 6% and 7%, respectively.
Of course, there are other factors also waiting in the wings with the potential to upset the investment applecart further. Despite the market being closed this coming Friday, the non-farm payrolls report is nonetheless scheduled for release in the morning.
Expectations for 50,000 jobs to have been added in March follow a startling report the previous month, where 92000 jobs were lost. It remains to be seen whether this contained something of a seasonal effect, and whether the second-round effects of the oil price surge are washing through in the first full month following the conflict outbreak.