Escalation in the Middle East

We are closely monitoring events in the Middle East and assessing them from a geopolitical perspective. From an investor’s point of view, it is important to remain calm. Although oil prices have continued to rise, global bond and equity markets have remained relatively calm.

Since Saturday, there has been a war between the US, Israel and Iran – with overwhelming superiority. The Israeli-American air strikes against Iran appear to be continuing, and there is currently no end in sight. The operation will last ‘as long as necessary,’ according to the Israeli side. The Israeli Defence Minister announced that Israel had gained air superiority over Iran barely 24 hours after the operation began. The Iranian armed forces responded with missiles and drones, which were fired not only at Israel but also at targets in seven Gulf states. According to the United Arab Emirates (UAE), Iran fired 165 ballistic missiles and more than 500 drones at the UAE alone over the weekend. Targets in Iraq, Kuwait and Bahrain were also targeted by Iran.

A new era is dawning for the Islamic Republic, whose supreme leader was killed in an Israeli attack. The hard-line regime, which is said to have killed thousands of demonstrators on the streets just a few weeks ago, could be overthrown. Bringing about an epoch-making change through an uprising of democratic forces within Iran is probably the main priority for US President Donald Trump. For Israel, the aim is to eliminate Iran’s military-political caste, which has developed over decades of enmity, for defensive reasons. But no one has any interest in an anarchic civil war, not even the wealthy petro-states in the Gulf that have been attacked. As small states, they cannot afford to burn all bridges with their neighbour Iran, which has a population of more than 90 million.

The neighbourhood is particularly close to the Strait of Hormuz. At its narrowest point between the Arabian Peninsula and Iran, the shipping route through which around 25% of the world’s oil and gas trade is conducted is only around 30 kilometres wide. It seems that preparations have been made for a complete blockade by Iran.

What does the conflict mean for investors? Risk appetite is likely to be subdued at present. However, volatility on various stock markets rose only slightly on Asian trading floors. The resilience of the markets is certainly facing a test. The US dollar is trading almost unchanged, and gold (+2%) reacted only slightly. Oil prices have risen by 6% since Friday and are now 25% higher than at the beginning of the year. In the short term, oil prices could rise further. In the longer term, however, OPEC’s expansion of production and Iran’s integration into the sanctions-free global energy trade following a possible regime change could cause oil prices to fall to USD 40 per barrel of crude oil. This would be associated with positive prospects for inflation and global economic growth.

In recent years, the US has become the world’s largest oil-producing nation. In addition, more and more oil and gas is being exported from the US. This leads to the conclusion that the dollar could appreciate in the near future.

European stock markets are currently (7:30 CET) expected to be around 1.5% lower.

We are continuously reassessing the situation and will provide further information in the coming days.

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