Middle East tensions boil over, as financial markets react

Tensions in the Middle East have ratcheted up substantially on Tuesday. Iran has launched more than 200 ballistic missiles against Israel, in retaliation for Israeli attacks against Hezbollah in Lebanon. Although it was hard to see Iran standing idly by while the IDF launched a ground offensive in Lebanon, markets remained clam earlier on Tuesday. Once Iranian ballistic missiles rained down on Israel, the markets reacted. The question is, will this blow over with little escalation, like it did in April, the last time that Iran launched missiles against Israel, or is this the start of a new, more dangerous chapter in the history of this conflict?

Us tech stocks take a hit as investors flock to safety

US stocks are lower across the board. The Nasdaq is the weakest performer, and is down nearly 2%, the S&P 500 is down 1.3% so far, and the dollar is at its highest level in more than a week. The oil price had an about-turn on Tuesday, and is higher by more than 4%, after initially falling earlier in the day. Brent crude oil is now approaching $75 per barrel. Investors are rushing to the safety of gold, and it is up more than $30 on the day and is currently $7 per ounce away from the record high reached last week. The global sovereign bond market rally that started after the Eurozone’s inflation print for September fell below the 2% target rate, has gathered pace. The 10-year US Treasury yield has fallen 5 basis points so far today, French and German yields are lower by 10 basis points and 8 basis points respectively.

Energy and defense are top performing sectors

Oil companies and defense firms are the top performing stocks in the US on Tuesday, for obvious reasons. Occidental Petroleum, Conoco Phillips, Lockheed Martin, Northrop Gruman and Halliburton all rising more than 3% on Tuesday afternoon. The biggest decliners are big tech stocks, the S&P 500 is being led lower by Dell, Nvidia, Intel and Micron Technology, which are all lower by more than 4%. Magnificent 7 stocks alone account for nearly a third of the S&P 500, so when these stocks are in trouble, they weigh on the entire index.

Why is tech selling off?

While there is no obvious reason why US tech should sell off on the back of Middle East tensions, it could be a rapid reallocation of resources to safe havens, in case this leads to a prolonged conflict in the region. The US has pledged to defend Israel if it comes under attack from Iran, the question now is, how far will Iran have to go for the US to step in? Investors could be willing to take profit from the top performing tech stocks and move money into safe havens until the situation in the Middle East calms down.

The ‘ideas’ trade is on pause

Bitcoin is also sharply lower on Tuesday, and it is currently down more than $2000. This suggests that investors are ditching ‘ideas’ trades like crypto and AI in favour of established safe havens like gold, oil and US Treasuries. We expect that ‘physical assets’ or assets backed by the might of the US economy like Treasuries, will continue to be favoured if the conflict remains ongoing.

What happens next?

This continues to be a fluid situation. If the situation is resolved quickly, for example, like when Iran launched missiles into Israel back in April, then we could see a short-lived rush to safety, and we would expect stocks and tech companies to recover. If the US is dragged into this conflict and has to defend Israel, then the financial market impact of today’s events will be more long-lasting. The US Presidential election, which takes place in a little over a month, complicates the picture even more. The world’s most important Western power is changing its leader at the same time as tensions in the Middle East are boiling over. This is likely to enhance the volatility experienced by financial markets, and we expect asset prices and risk sentiment to be sensitive to headlines and news flow in the coming days.

Overall, the markets are in wait and see mode. The next 24 hours will be critical to see how far this situation escalates and whether the rush to safe havens was justified.