Investors Unsettled by Middle East Tensions
Iran's attack on Israel has dented investor confidence, raising concerns that risky assets could be sold off sharply if the situation worsens.
In the morning trading session on October 2, a series of Asian stock markets went down. The Nikkei 225 index (Japan) decreased by 1.6%. The Kospi (South Korea) lost 0.2%, at one point falling by 1.3%.
Australia's S&P/ASX 200 fell 0.3%. The MSCI Asia Pacific Index lost 0.5%. Malaysia, Thailand and Indonesia were also in the red. Mainland China and Hong Kong markets were closed for a holiday.
The move was similar to Wall Street on October 1. The S&P 500 fell 1.4% at one point, then closed down 0.9%. The Nasdaq Composite also lost 2.3% at one point, before closing down 1.5%. The DJIA fell 0.4%.
Traders on the New York Stock Exchange (NYSE). Photo: Reuters
Risk assets were sold off as tensions in the Middle East escalated. Iran launched a missile attack on Israel in retaliation for the killing of Hezbollah and Hamas leaders. The Israeli Defense Ministry estimated that Iran launched more than 180 ballistic missiles, while the Pentagon said Tehran fired nearly 200.
Historically, political turmoil, such as Russia’s military intervention in Ukraine in 2022, has caused large but short-lived market swings. These events have also seen investors sell off risky assets and flock to safe-haven assets.
However, the market reaction this time depends on Israel's response and the level of escalation of the conflict between the two economies. Israeli Prime Minister Netanyahu warned that Iran made a " grave mistake " and would pay the price.
"The market is very sensitive to any signal that things could get worse," Hasnain Malik, head of frontier and emerging markets equity strategy at Tellimer, told Reuters.
In April, Iran launched missiles at Israel for the first time in its history. The missiles were intercepted. Israel then launched airstrikes against Iran in response. Stocks and other risk assets sold off, but recovered within days as tensions did not escalate.
"If this war heats up, it's definitely not good news for the markets," said Allan Small, senior investment advisor at Allan Small Financial Group.
Another concern for investors is oil prices. The Middle East is one of the world’s key crude oil producing regions. Iran is currently the third largest oil producer in OPEC (Organization of Petroleum Exporting Countries). Political tensions could therefore disrupt supply, pushing up prices.
Brent crude rose 2.6% to $73.50 a barrel. U.S. West Texas Intermediate crude added 2.4% to $69.80. Prices are now continuing to rise, with both up 1.4%.
Safe havens also rose. The world gold price increased by $30, to $2,664 an ounce. Currently, each ounce is around $2,655.
The US dollar, yen and Swiss franc - all known as safe havens - also rose. The US dollar recorded its biggest weekly gain, with the Dollar Index rising 0.5% to 101.2. Currently, each US dollar is worth 143.4 yen and 0.84 Swiss franc.
"Political risks always overshadow economic news, corporate earnings or central bank responses, as political volatility is more unpredictable. The situation remains uncertain, any calming or escalating reactions from Israel and Iran could have a major impact on investor sentiment," Chris Weston, research director at Pepperstone, concluded.