Iran attacks show US haven status is in peril – Financial Times
Reading too much into immediate short-term market reactions to major geopolitical news events is ghoulish and foolish. People are dying and no one knows what will happen next.
Nonetheless, the uncertainty emanating from the assault on Iran and the regional conflict it has generated is what matters most in the world’s major financial centres. It also plays a part in how the situation develops.
Here, two things are important. First, yes, stock markets have taken a knock following this weekend’s bombing of Iran by the US and Israel. But at this stage — and at the risk of speaking too soon — it is a mild wobble. European stocks shed around 2 per cent, US stocks opened about 1 per cent lower, oil shot up but only to $79 a barrel — the highest point only since June. This is, Deutsche Bank points out, the 38th-biggest spike in oil prices since 1990.
None of this is a disaster. Indeed, the hit to US stocks is on a par with the damage inflicted by a blog post published a week ago outlining the potential impacts on the labour market from AI.
Crucially, none of it is enough to force a rethink in the White House. We have learnt time and time again in the past year or so that President Donald Trump does, eventually, step back from the brink when markets really convulse. A 1 per cent decline in his beloved Dow Jones Industrial Average is simply not enough for him to alter his strategy, whatever that is, on Iran.
Second, the government bond market is sending some important messages. Generally, in a breakout of extreme uncertainty and stress such as the one we see today, investors rush in to the safety of government bonds, particularly US government bonds.
This time, that is not playing out. Bonds are in fact a little weaker, pushing borrowing costs a nose higher. This is the market’s way of saying the big threat to emerge from this crisis is one of inflation, which eats away at the allure to investors of debt.
Higher energy prices do not have the power to drive up inflation in the way they once did, particularly in the US. But any additional pressures on the cost of living in the US, especially ahead of midterm elections in November, put Trump on a direct collision course with his central bank. He wants lower interest rates, and fast, and has picked a new Federal Reserve chair to pick up the reins and drive policy in his preferred direction. But already, some at the Fed have suggested that the next move in interest rates could be either higher or lower. Any pick-up in inflation will make it much harder for them to choose the path the president wants.
Another important wrinkle here is that US government bonds have weakened slightly more than bonds from other developed markets. This forms yet another piece of anecdotal data suggesting that US Treasuries are losing their status as the world’s go-to asset in times of crisis — the result, investors say, of erratic geopolitical and economic policy and the erosion of institutions under Trump. Instead, they are heading towards gold, which is approaching the record-high price it set earlier this year.
Again, the decline in Treasuries prices is not huge, and again, the conflict is new. If it intensifies further, global investors could still decide that better the devil you know, and Treasuries are still the best bolt-hole in town. For now, though, this serves as another warning sign to US authorities that their haven status is in peril.
The mood among investors was quite fragile even before the strikes on Iran took place — jitters over AI wrecking the global economy, misplaced though they may be, shook up the markets last week, and the once runaway private credit industry is forming new hairline cracks on a near-daily basis. It is not hard to imagine these two factors feeding off each other and creating a serious market rout at some point.
And yet for now markets are proving to be surprisingly resilient in the face of trauma. Trump and his administration will see nothing there today to convince him of the need for a change in direction.
Investors are telling themselves that, setting aside the appalling human cost of the conflict, nothing here will knock the global economy off course and that the president wants the violence to wrap up quickly. That means, for many, there’s no need to jump hard in or out of any part of the market.
Complacency, perhaps, but if anything, relatively robust stocks once again are giving him the green light to keep on going.
