Investors Set to Flock to Safety as World Awaits Iran’s Response

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The reaction was less straightforward in the $29 trillion market for US Treasuries since the conflict began. Yields initially sank but the moves swiftly reversed over concern about a resurgence in inflation. US Treasuries are, overall, little changed since June 13, with the yield on 10-year notes rising since then by less than two basis points to close Friday at 4.38%. 

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Following are comments from strategists and analysts on how they expect investors to respond on Monday:

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Emmanuel Cau, head of European equity strategy at Barclays Plc

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In the very near term, markets may be worried about Iran retaliation, and whether or not it blocks the Strait of Hormuz… Recent crises in the region have shown that the impact on equities from oil shocks tend to be short lived, and usually end up as medium-term buying opportunities. In fact, if the conflict results in bringing more stability and peace to the Middle East, it could be seen as bullish for risk assets over the medium term.

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Diego Fernandez, chief investment officer at A&G Banco in Madrid

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“We expect some risk off, but not an aggressive one. The world may be a safer place without the Iranian nuclear threat, but we still need to see the Iranian reaction and how the conflict evolves.”

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Anthony Benichou, cross-asset sales at Liquidnet Alpha trading desk

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Trump couldn’t afford for this to drag on. If oil stays elevated too long, especially heading into the midterms, it’s a political headache. High gas prices hit Main Street, fuel inflation, and turn voters against you. So the move had to be fast, surgical, and decisive. Note how impressive the risk premium has stayed contained in oil — short-term vols have spiked, but there’s been little spillover elsewhere. If Iran were to shut down (the Strait of Hormuz), they’d be cutting off their own main revenue lifeline — effectively speeding up their own collapse.

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Alfonso Benito, chief investment officer at Dunas Capital

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It is a very worrisome situation. Investors have some hours to digest the attack before the market opens Monday, and a lot will depend on what Iran does if it responds or not. Anyhow, it’s not good.

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Manish Kabra, head of US equity strategy at Societe Generale SA

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Equities are likely to only see a shallow drop because central bank policies are much more accommodative than in previous oil shocks. There’s also no euphoria in markets in terms of flows. It won’t be like we had in 2022 when the S&P 500 and European stocks dropped 20%. Our take is that the Fed may actually ignore any potential oil shocks and that’s why I still say there’s a good possibility that the S&P 500 will make new highs this year.

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Anthi Tsouvali, strategist at UBS Global Wealth Management

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We’re definitely in a higher-risk environment than we were on Friday. Markets will react, but probably still modestly in equity markets. We’re for sure going to see oil going higher. Investors will also have to think about the impact of higher oil on inflation, and if that’s the case, Europe is going to be hit harder than the US. Uncertainty has been very high this year and now this is another event that’s added to it. So we’ll see some volatility but right now, given the information we have, I don’t see that it’s going to be long lived. So far, we haven’t seen bombings of energy facilities and the Strait of Hormuz hasn’t closed. Markets will appreciate that. While there’s going to be risk-off sentiment for sure, hopefully it’s not going to be long lived or too deep.

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Aneeka Gupta, head of macroeconomic research at Wisdom Tree UK Ltd.

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Up until now, the war was very much focused on the Middle East, but with the US’s involvement this looks a lot more serious in nature and the risk is really spreading out in a very big way. In terms of markets, we’ll definitely see the biggest impact in commodity markets and energy prices are likely to go even higher. We’re also likely to see these tensions reverberate across equities. Markets are going to be pricing in a wide variety of possibilities about how Iran is going to escalate. The worst-case scenario would be Iran trying to close the Strait of Hormuz. The first impact would be seen in oil markets and then quickly resonate across stocks and bonds. From an equity market perspective, this is very much risk off.