Talion – the punishment must match the severity of the crime committed. The increasing geopolitical instability in the Middle East and expectations of retaliation are impacting market valuations. Investors are drastically shortening their decision-making time, often reacting to emerging news within the same trading day.
The conflict in the Middle East fuels market pessimism, a flight to safety, and a shortening of the investment horizon, evident in “W-shaped” patterns of market volatility. In essence, investors seem to be continually adjusting to shifts between geopolitical escalation and relaxation, akin to the Talion law principle of “an eye for an eye”. Current oil prices at $90 appear to incorporate a geopolitical risk premium of $5 to $10.
It also seems that the current geopolitical scenario might prompt central banks to adopt a slightly more dovish stance. Significant intra-day volatility in the equity markets, influenced by both technical and fundamental factors, is likely to heighten short-term market volatility, regardless of whether the news is political, geopolitical, or financial.
The conflict in the Middle East stokes market pessimism. The growing instability in the region currently has a significant impact on market valuations. Investors drastically shorten their decision-making time, often reacting to emerging news within the same trading day. This shortened investment horizon has led to “W-shaped” patterns of market volatility as investors continuously adjust between geopolitical escalation and relaxation. Current oil prices, at $90, seem to include a geopolitical risk premium of $5 to $10. Considering our forecast for the next two years to stabilize around $80, the current valuation already incorporates significant geopolitical uncertainty. Moreover, a global surplus in production capacity might prevent any fundamental shifts in oil market trends. Thus, the current situation is expected to have a minimal impact on medium-term economic forecasts based on crude oil.
The current geopolitical scenario is likely to prompt central banks towards a more dovish stance, influenced by stable commodity prices and potential consumer spending reductions due to increased conflict fears. Allianz Trade anticipates periodic market shifts towards safe assets (such as the defense sector, gold, and bonds from developed markets) driven by the ongoing regional principle of “an eye for an eye” – the law of Talion. Although Allianz Trade expects increased market volatility, we do not foresee the situation leading to extreme dangers such as a full-scale war or a complete disruption of oil supplies through the Strait of Hormuz, which accounts for about 17% of global oil production. Significant intra-day volatility in the stock markets can largely be attributed to high valuations and extreme market positions. Focusing on the American markets, the impact of major stocks, often referred to as the “Magnificent 7”, has led to a reduction in market risk premiums, strongly favoring short positioning. This indicates that both technical and fundamental factors are prone to exacerbating short-term market volatility, regardless of the nature of the news.
