Escalating Geopolitical Conflicts and Rising Risk Aversion: Market Outlook from an Economic Perspective
On April 13th, the direct military attack by Iran on Israel has led to an escalation of regional conflicts. Geopolitical risks and inflationary pressures are now starting to impact global risk aversion, with stock markets potentially being among the earliest victims.
Escalation of Iran-Israel Conflict: An Economic Challenge for Global Markets
The escalation of tensions between Iran and Israel poses an economic challenge for global markets. Geopolitical risks and their potential consequences are now at the forefront of market concerns, becoming an integral part of investment models.
Rising Risk Aversion: Middle East Tensions in Focus
The escalation of conflicts between Iran and Israel has shifted market focus towards the Middle East. Intensifying geopolitical conflicts have made geopolitics a key point of interest for markets—a long-term trend that has been incorporated into investment models.
Gold, the US dollar, and bonds have become preferred safe-haven assets, with limited short-term alternatives. Given the Middle East tensions, gold, the US dollar, and bonds are likely to continue to be driven by risk aversion in the short term. Oil prices, influenced by the Middle East conflicts, have risen, leading to inflationary pressures that may further dampen expectations of US interest rate cuts.
Flattening of US Treasury Yield Curve: Capital Inflows and Inflationary Pressures
The Iran-Israel conflict has exerted pressure on US inflation prospects, but risk aversion has driven capital inflows into the bond market. US Treasury yields are influenced by factors such as inflation and delayed interest rate cuts, keeping short-term rates at relatively higher levels, while long-term rates face downward pressure from risk aversion and rising inflation, resulting in a flattening trend.
Potential Strength of the US Dollar: Impact of Risk Aversion and Interest Rate Differentials
The rise in risk aversion may drive the US dollar higher once again, influencing US stock market sentiment. Market observations reveal a significant increase in the yield differentials between US and European bonds, signaling expectations of delayed interest rate cuts in the US and earlier cuts in the Eurozone. Consequently, foreign investors may reduce their allocations to US bonds, potentially leading to a stronger US dollar compared to the Euro. Interest rate differentials predict that the euro exchange rate could drop below 1.05.
The above perspectives, based on an economic viewpoint, analyze the impact of the escalation of conflicts between Iran and Israel on the market and the changing risk aversion sentiment. They provide market outlook and investment considerations.