Likely market reaction after Iran attacks Israel

(Reuters) -Iran warned Israel and the United States on Sunday of a “much larger response” if there is any retaliation for its mass drone and missile attack on Israeli territory on Saturday, as Israel said “the campaign is not over yet”.

Iran launched explosive drones and missiles at Israel in retaliation for a suspected Israeli attack on its consulate in Syria on April 1, a first direct attack on Israeli territory that has stoked fears of a wider regional conflict.

Below are analysts’ quotes on how financial markets are likely to react to developments.

JANE FOLEY, HEAD OF FX STRATEGY, RABOBANK, LONDON

“Outside of gold and oil prices, asset prices have been pre-disposed to play down geopolitical news in recent months. This suggests that Israel’s success in repelling Iranian missiles will be taken as a reason to reduce risk aversion at the start of the trading week.”

“That said, there has been a clear increase in geopolitical risks connected with the Middle East meaning plenty of scope for volatility in the coming weeks and months.”

MICHAEL PURVES, HEAD OF TALLBACKEN CAPITAL ADVISORS

“If oil keeps going higher from here, it actually makes U.S. bond fundamentals a bit worse by keeping inflation higher for longer and making the Fed’s propensity to cut rates even less.”

“An offsetting factor is that whatever happens, there’s going to be nervousness and that’s going to keep bonds from selling off too much more.”

“We’ve had a lot priced into the U.S. equity market already. On the one-hand, there was a risk-on condition going into the year and risks will ultimately get bought.

“But ultimately, why not book some profits when the newsflow is so uncertain?”

SAMY CHAAR, CHIEF ECONOMIST LOMBARD ODIER, GENEVA

“The newsflow is about Iran and Israel, so that is going to be most of (what people will be discussing Monday), but we are still in an environment where we haven’t yet digested the U.S. inflation news and what that means for the Fed, and will they be able to cut rates.

“We came into this weekend of geopolitical stress in the aftermath of the CPI report. It is a fragile market environment in the short term, but after a fantastic period, so it is only fair that there’s a bit of vulnerability.”

TINA FORDHAM, FOUNDER AND GEOPOLITICAL STRATEGIST, FORDHAM GLOBAL FORESIGHT, LONDON

“The scale of Iran’s attack on Israel and the launch from inside Iran as well as via proxies is significant. In terms of the market reaction, we started to see commodity prices moving higher on Friday.

“Over the next few days, we are waiting for Israel’s response — this is the biggest attack on Israel in decades. The risk of a regional war has increased meaningfully. The question becomes does Israel seek to broaden the conflict? That is the wild card.

“I think oil will open higher. Also signs that Iran wants to enact a soft blockade of the Strait of Hormuz is a concern, as this means there are potential both supply chain disruptions and higher oil prices. We have entered a dangerous period ahead of the U.S. elections.”

NICK FERRES, CHIEF INVESTMENT OFFICER, VANTAGE POINT ASSET MANAGEMENT, SINGAPORE

“I am not going to be an “armchair general” and pretend that I have an edge on how the escalation will play out. From our perch, the more important news for markets last week was the trend re-acceleration in consumer price inflation and the implication for the path of future short term interest rates.

“Moreover, disappointment in the detail of the results from JPM and Wells on Friday. In that context, as we have noted for some time, risk compensation in equities is poor in outright terms and relative to Treasuries. We had already reduced our net long equity exposure ahead of this over the past two weeks.”

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MILWAUKEE, WISCONSIN

“The key is whether Iran will consider this retaliation a measured and final response, unless Israel decides to escalate. In 2020, Iran considered its response to the U.S.’s killing of General Soleimani a measured and equitable response. If it stays tit-for-tat instead of escalating, then we will likely see a sigh of relief across equities even if oil prices, gold, the dollar and bonds all embed a risk premium to reflect the conflict.”