LONDON, May 27 – The Iran conflict has now stretched into its fourth month, creating a stark divide in global financial markets as elevated oil prices fuel fresh concerns about inflation among policymakers, and weakening currencies present challenges for several Asian nations.
However, the ongoing conflict has provided a boost to certain assets, particularly petroleum and the dollar’s status as a secure investment.
Here’s an examination of the notable gainers and those suffering losses.
PETROLEUM’S BROADER CONSEQUENCES
Crude oil’s approximately 40% surge has disrupted expectations for inflation and monetary policy. In physical trading, petroleum prices have climbed well beyond $100 per barrel and reached nearly twice their pre-conflict levels during early April.
A historic 400-million-barrel drawdown from major economies’ strategic stockpiles, combined with traders securing alternative supply sources, has helped offset the supply shortage. However, pressure on the worldwide energy infrastructure continues to mount.
ARTIFICIAL INTELLIGENCE SURGE SUPPORTS EQUITIES
International stock markets have managed to navigate the turbulence thus far, as renewed artificial intelligence enthusiasm and broader expectations for a peace agreement outweigh the conflict’s negative effects.
American equities have reached new peaks, as has South Korea’s Kospi index. European markets are approaching record territory.
SK Hynix achieved a $1 trillion market capitalization for the first time Wednesday, joining fellow memory chip companies Samsung Electronics and Micron Technology in reaching this benchmark during an AI-fueled surge.
However, not every sector is benefiting.
The S&P 500 passenger airlines index has declined more than 6% since hostilities commenced due to worldwide flight disruptions. A global luxury portfolio has dropped 10%, showing investor concerns that inflation might impact consumer spending.
HSBC Private Bank global CIO Willem Sels noted the firm maintains an underweight stance on consumer-related products and services.
“It provides us with a hedge in case the conflict accelerates,” he said. “Consumption has done reasonably okay, certainly in the U.S. where you have better-off households who still consume a lot and are benefiting from AI.”
DOLLAR MAINTAINS DOMINANCE
The dollar has emerged as another beneficiary, with investors turning to its safe-haven characteristics. It has risen 1.5% versus other major currencies since hostilities began, outpacing the Swiss franc and yen.
Climbing U.S. Treasury yields have enhanced the dollar’s attractiveness, though some observers note it continues facing U.S. policy uncertainty and will probably decline when the conflict concludes.
“We are currently neutral but still expect a weaker dollar in the medium term,” said Van Luu, global head of solutions strategy at Russell Investments.
ASIAN CURRENCIES EXPERIENCE PRESSURE
Asia had purchased approximately 80% of petroleum transported through the now-closed Strait of Hormuz, and remaining fuel supplies cost more than previously. This situation is damaging growth and making their currencies among the worst performers since the conflict began.
India’s rupee, Indonesia’s rupiah and the Philippine peso have reached record lows versus the dollar, prompting some nations to raise interest rates or utilize foreign exchange reserves to mitigate the impact.
Sri Lanka surprised markets Tuesday with a 100 basis point increase.
Among Asian currencies, only China’s yuan has maintained stability, supported by significant domestic energy supplies.
ADDITIONAL DAMAGE TO WORLDWIDE ECONOMY
The petroleum price spike has also damaged the global economy, especially nations dependent on energy imports.
Within the euro zone, economic activity contracted at its steepest pace in over two-and-a-half years during May, according to S&P’s composite purchasing managers index.
The conflict’s effects are worsening Europe’s financial weaknesses, the European Central Bank cautioned in a Wednesday report.
British firms also reported declining activity alongside rising input costs due to increased energy expenses.
The U.S., which maintains oil and gas independence and where AI investment is climbing, has experienced less economic damage.
Nevertheless, the international nature of petroleum markets means U.S. gasoline prices have reached a four-year peak of $4.56 per gallon.
BONDS SUFFER LOSSES
Government bonds are also among the losing investments, as the petroleum price surge has led traders to consider the possibility of higher rates responding to energy-driven inflation.
Anticipation of increased fiscal and military expenditures has added pressure on longer-term securities.
The Federal Reserve may abandon its easing stance soon, and U.S. 30-year Treasury yields have climbed to their highest levels since 2007, trading above 5%.
German Bund yields have reached their highest point in more than 15 years as traders anticipate at least two ECB rate increases by year’s end.
