Stocks and bond investors traded cautiously on Monday as the escalating conflict between Israel and Iran entered its fourth day.
The two countries exchanged new attacks amid pleas by officials from around the world to scale back hostilities. European and U.S. leaders spoke with the Israeli prime minister, Benjamin Netanyahu, on Sunday to try to de-escalate tensions.
Stocks in Asia and Europe were mostly higher on Monday. Futures for the S&P 500, which indicate how the index might perform when trading begins in New York, were up 0.5 percent.
Oil prices, which have had a more discernible response to the fighting, were choppy. An early rise in the price of Brent crude, the primary global benchmark, faded, with prices roughly flat in the European morning, at around $74 per barrel. Oil prices gained almost 12 percent last week.
After Israel’s initial attack on Friday, and Iran’s response, both countries continued to launch missiles at each other over the weekend. Israel attacked parts of Iran’s energy infrastructure — including one of the world’s largest natural gas fields, and an oil refinery. But the attacks had spared the Kharg Island facility, from which nearly all of Iran’s oil exports are shipped.
Analysts caution that Iran could threaten oil exports out of the Persian Gulf, by choking off shipping traffic through the Strait of Hormuz. That would severely disrupt energy markets, and could push prices sharply higher.
Stock investors have so far taken the escalating conflict in stride. Stocks around the globe fell on Friday, after Israel’s attack began, but the drop wasn’t nearly as severe as the sell-offs that followed the escalation of President Trump’s trade war. In the United States, for example, the S&P 500 fell about 1.1 percent on Friday.
The conflict could yet come to haunt stock investors if the jump in oil prices adds to inflation. Already, U.S. investors are worried about prices rising because of higher tariffs and a crackdown on immigration. Accelerating inflation on top of a slowing economy, a rare situation known as stagflation, can be damaging to financial markets.
“In short, higher oil prices exacerbate the ongoing stagflation shock stemming from tariffs and immigration restrictions,” said Torsten Slok, chief economist at Apollo Global Management.
The Federal Reserve is set to meet this week to consider changes to interest rates. But it is expected to leave rates unchanged as it waits to fully assess the impact that continually changing government policies and rising geopolitical instability have had on inflation and the labor market.
Investors have pushed back bets on when the Fed will next lower interest rates to later in the year, following Israel’s initial attack last week.
Some analysts, however, said they didn’t expect the rise in oil prices to affect the Fed’s decision making, given that energy prices are frequently stripped out of inflation calculations because of their volatility. For example, if the fighting between the two countries stops, oil prices could quickly drop.
“The fear that the Fed will be cautious to cut because oil is rising (because of a war) seems very misplaced,” Peter Tchir, head of macro strategy at Academy Securities, wrote in a note to clients over the weekend.
Joe Rennison writes about financial markets, a beat that ranges from chronicling the vagaries of the stock market to explaining the often-inscrutable trading decisions of Wall Street insiders.
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