Besides the classic “as expected,” one of analysts’ favorite phrases is “the markets are talking.” This means that significant price changes can be an indication that something big is about to happen.
For example, when investors expect an increase in geopolitical tensions that could lead to disruptions in supply chains or oil or gas production, the dollar index, the price of gold and even government bond prices typically rise.
At the moment, fears have resurfaced among investors. This is good news for those who hold long positions in these instruments, but not so good for those who are faced with the potential consequences.
Unlike last week, the uncertainty does not lie in the rapid deterioration of macroeconomic data (which have improved in the US), but again in geopolitics.
In Europe, for example, gas prices have risen mainly due to the escalating conflict between Russia and Ukraine and, in particular, the alleged seizure of a gas metering station in Sudzha by Ukraine.
There are fears that this could lead to a disruption of Russia’s last direct gas supplies to the EU due to damage or Gazprom declaring force majeure, leaving Hungary, Austria and Slovakia without cheap supplies.
However, analysts believe that prices will not return to 2022 levels, as this only affects 5% of the total supply. They believe that the market is overreacting and that prices will eventually adjust.
It was also a turbulent few weeks for black gold. The Brent oil chart was more like a rollercoaster: steep rises and falls. Several factors played a role here.
First, worries about a recession in the US pushed prices down to $75. Then they jumped to $82 on fears of a military response from Iran against Israel. Now the markets are waiting to see what happens next.
According to Barron’s, a significant escalation could lead to severe disruptions to oil production and transit routes, especially through the Strait of Hormuz, through which about a fifth of global oil supplies flow.
In addition, an attack could lead to Western countries imposing sanctions on Iran’s crude oil exports, which amount to 1.5 million barrels a day, potentially leading to a rise in gasoline prices in the long term.
What long-term effects will both conflicts have?
If the situation worsens and a worst-case scenario occurs, energy markets could rise. That would be bad news for both central banks and the economy in general.
Regulators may be forced to delay rate cuts, which would put additional pressure on companies that could potentially be pushed into bankruptcy. However, at present the market does not believe this will happen.
