Oil shock, rising yields test how long investors can stay relaxed about middle east conflict
Markets are treating the Iran war as a passing shock – and Goldman Sachs CEO David Solomon thinks that complacency could prove costly.
According to Reuters, Solomon said he was surprised at the “benign” reaction in financial markets to the conflict in the Middle East and warned that it may take a “couple of weeks” for investors to more fully digest the impacts.
He told a business summit in Sydney that he was “surprised that the market reaction has been more benign than you might think,” adding that markets tend to react only mildly to geopolitical shocks unless they directly threaten economic growth.
At the Australian Financial Review Business Summit, CNBC asid that Solomon repeated that he was “actually surprised” and said, “I think the market reaction has been more benign, given the magnitude of this, than you might think.”
He added, “I think it’s going to take a couple of weeks for markets to really digest the implications of what’s happened both in the short term or in the medium term.”
Reuters reported him saying, “There’s a cumulative effect of everything that’s happening and a much harsher reaction. Up to this point, we haven’t seen that cumulative effect,” and, “it’s very hard to speculate because there is so much that is unknown at this point.”
The most immediate pressure point is energy.
Oil prices have spiked as the widening conflict stoked supply worries, exacerbating investor concerns about inflation, Reuters said.
CNBC reported that investors focused on crude after Iran said the Strait of Hormuz had been shut and any vessel passing through would be targeted.
International benchmark Brent crude futures with May delivery rose 2.7 percent to trade at US$83.58 per barrel, while US West Texas Intermediate futures with April climbed 2.3 percent to reach US$76.26.
Energy strategists have warned to CNBC that oil prices could surge above US$100 per barrel if the Strait of Hormuz is closed for a prolonged period.
Bloomberg reported that Brent edged higher near US$83 a barrel after surging in the previous two sessions, as the market reacted to a New York Times report that operatives from Iran’s Ministry of Intelligence reached out through another country’s spy agency to the CIA with an offer to discuss terms for ending the conflict.
Iran later denied the report, Bloomberg said.
The conflict has upended global energy flows, forcing major producers to shut output and all‑but stopping traffic through the Strait of Hormuz.
US President Donald Trump said on Tuesday the US International Development Finance Corporation would offer insurance to vessels and provide a naval escort “if necessary” to help ensure the flow of energy and other trade.
Equities and bonds are signalling tension, but not full‑blown stress.
Global stock indexes have slumped while the US dollar has strengthened as investors sold riskier assets and flocked to traditional safe havens, according to Reuters.
However, Wall Street losses have been relatively mild, with the S&P 500 down less than 1 percent this week after paring early losses into the close on both trading days.
CNBC reported that the Dow Jones Industrial Average was down 0.83 percent, the S&P 500 slipped 0.94 percent, while the Nasdaq Composite shed 1.02 percent.
US Treasury yields have been rising, defying the typical safe‑haven playbook.
Usually, geopolitical conflicts push investors into bonds, lifting prices, and lowering yields.
This time, CNBC reported that bond prices are falling and yields are climbing as investors worry that higher energy prices could stoke inflation and keep interest rates elevated for longer.
In emerging markets, Bloomberg reported that a gauge of emerging‑market currencies rose as much as 0.2 percent, led by the South Korean won, with the Colombian peso erasing Tuesday’s losses and the Chilean peso also among the top gainers.
“Risk appetite has bounced back as stocks rise and oil steadies,” said Alejandro Cuadrado, head of global FX and Latin America strategy at Banco Bilbao Vizcaya Argentaria SA, according to Bloomberg, who still warned that “some scenarios of a protracted conflict and much higher oil prices call for some dip‑buying caution.”
Bloomberg said European markets were strong, with “the Hungarian forint posting the best recovery in the region” and major equity indexes in Budapest, Warsaw and Johannesburg “up more than 2 percent.”
But the benchmark EM stock index was still 3.5 percent lower on the day and had extended its slump since the US and Israel started bombing Iran to 8.4 percent.
Solomon is balancing those risks against what he still sees as a robust US backdrop.
Reuters reported that he said people should “put aside what’s going on in the Middle East at the moment” because strong macro tailwinds make the United States’ economic growth outlook “quite compelling.”
He added that there is “a reasonable probability” the US economy runs a bit hot this year and that inflation could end up slightly higher than markets expect.
