Noel Randewich
Updated 5 min read
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By Noel Randewich
(Reuters) -Financial markets may be in for a "knee-jerk" selloff if the U.S. military attacks Iran, with economists warning that a dramatic rise in oil prices could damage a global economy already strained by President Donald Trump's tariffs.
On Thursday, Brent crude (BZ=F) rose 1% and settled at $77.62 a barrel and West Texas Intermediate (CL=F) also gained 1%, settling at 76.16 a barrel.
Oil prices fell nearly 2% on Wednesday as investors weighed the chance of supply disruptions from the Israel-Iran conflict and potential direct U.S. involvement. The price of crude remains up almost 9% since Israel launched attacks against Iran last Friday in a bid to cripple its ability to produce nuclear weapons.
With major U.S. stock indexes trading near record highs despite uncertainty about Trump's trade policy, some investors worry that equities may be particularly vulnerable to sources of additional global uncertainty.
Chuck Carlson, chief executive officer at Horizon Investment Services, said U.S. stocks might initially sell off should Trump order the U.S. military to become more heavily involved in the Israel-Iran conflict, but that a faster escalation might also bring the situation to an end sooner. "I could see the initial knee-jerk would be, 'this is bad'," Carlson said. "I think it will bring things to a head quicker."
Wednesday's dip in crude, along with a modest 0.3% increase in the S&P 500 (^GSPC), came after Trump declined to answer reporters' questions about whether the U.S. was planning to strike Iran but said Iran had proposed to come for talks at the White House. Adding to uncertainty, Iranian Supreme Leader Ayatollah Ali Khamenei rejected Trump's demand for unconditional surrender.
U.S. Treasury yields fell as concerns over the war in Iran boosted safe haven demand for the debt.
The U.S. military is also bolstering its presence in the region, Reuters reported, further stirring speculation about U.S. intervention that investors fear could widen the conflict in an area with critical energy resources, supply chains and infrastructure.
With investors viewing the dollar as a safe haven, it has gained around 1% against both the Japanese yen and Swiss franc since last Thursday. On Wednesday, the U.S. currency took a breather, edging fractionally lower against the yen and the franc.
“I don't think personally that we are going to join this war. I think Trump is going to do everything possible to avoid it. But if it can't be avoided, then initially that's going to be negative for the markets,” said Peter Cardillo, Chief Market Economist at Spartan Capital Securities in New York. "Gold would shoot up. Yields would probably come down lower and the dollar would probably rally."
