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2024-05-02
How the Iran-Israel conflict will impact financial markets
We discuss with two scholars from the Faculty of Business Management at VILNIUS TECH - Dr. Irena Danileviciene from the Department of Financial Engineering, and Dr. Bahman Peyravi from the Department of Economic Engineering - how unfavourable geopolitical situations and military conflicts affect markets, investor choices, stock and oil prices, currency rates.
"Iran and Israel are both strategically significant: Iran is a major oil producer, while Israel is a Western ally with great strategic importance for the stability of the entire region. If the conflict between these countries persists, the world is likely to face an oil supply and economic crises. If sanctions or military interventions were to be imposed, it would further worsen the global economic and political situation," says Dr. I. Danileviciene.
Impact of conflicts will be felt by many
When countries engage in conflict, oil prices rise, leading to increased inflation and slowing economic growth. Rapidly rising inflation can affect both businesses and consumers' purchasing power, thus the consequences of this conflict can cause significant damage to many worldwide.
The expert notes that so far, financial markets have not reacted very strongly to this conflict, as there has been no panic selling of stocks. "Cryptocurrency prices have also changed insignificantly, but it is likely that the situation will change in currency markets. Since the safest and fairly stable currency is the US dollar, investors, avoiding risks, will choose investments in dollars. It could be expected that the conflict will destabilise the investment portfolios formed by investors," says Dr. I. Danileviciene.
After carefully observing the situation, Dr. Bahman Peyravi from the Department of economic engineering, points out that many experts currently indicate that Iranian and Israeli military actions could have long-term economic consequences and significantly affect global markets. Many of them suggest that "black holes have formed in the world economies," emphasising that what is happening is not just a temporary phenomenon but will create long-term effects. According to Dr. B. Peyravi, the expected fluctuations in gold, oil and dollar markets encourage investors to create new strategies. He is particularly concerned about a significant increase in gold and oil prices possibly contributing to the onset of a new global inflation.
People are choosing safer investments
According to experts, in the case of conflicts and unfavourable geopolitical situations, the safest investment is gold. In the context of economic slowdown and military conflict, investors usually abandon risky investments and opt for safer ones, so it is not excluded that investment in gold will increase, which will consequently increase the price of gold. This is one way to protect investors' money.
According to Dr. Irena Danileviciene, Iran and Israel are not the only countries significantly affecting the world's geopolitical situation. Eventhough the consequences of the conflict can be very serious, there are other factors affecting the situation in financial markets that should also be taken into account.
2024 - Election year. How is it affecting markets?
Dr. Bahman Peyravi from the Faculty of Business Management at VILNIUS TECH points out that during election years, expansionary monetary policy is applied. Global equity funds received $60 billion in inflows during the first quarter of this year. One of the main reasons is that more than 50 countries worldwide are planning to hold elections this year.
"It was expected that central banks, especially the FED, would reduce the interest rate by 160 basis points this year. Regional conflicts and rising energy prices, Brent crude oil starting the year at $75 per barrel and now trading at $90 per barrel, are causing reasonable concern in the financial world. These events may restrict central banks' actions in combating inflation," says Dr. Bahman Peyravi.
The threat of uncontrolled global inflation
According to Dr. Bahman Peyravi, both airlines and shipping are experiencing significant difficulties. Due to the conflict between Israel and Iran, and the conflict between Russia and Ukraine, at least ten airlines, including Qantas, Lufthansa, United Airlines, Air India, among others, are cancelling or changing flight strategies. Due to the potential risk in Iranian airspace, the route between Europe and Asia, airlines have limited alternatives to fly through Turkey, Egypt, and Saudi Arabia.
"Increasing tension, especially in the Red sea, also harms shipping, which inevitably affects the entire supply chain worldwide. Rising energy prices further strengthen Russia's position, whilst weakening the EU and US positions. The escalation of conflicts in the Middle East increases the risk that Iran will close the Strait of Hormuz, threatening complete global energy dependence on Russia, which will lead to skyrocketing prices," warns Dr. Bahman Peyravi about the threats of uncontrolled global inflation.
"Iran and Israel are both strategically significant: Iran is a major oil producer, while Israel is a Western ally with great strategic importance for the stability of the entire region. If the conflict between these countries persists, the world is likely to face an oil supply and economic crises. If sanctions or military interventions were to be imposed, it would further worsen the global economic and political situation," says Dr. I. Danileviciene.
Impact of conflicts will be felt by many
When countries engage in conflict, oil prices rise, leading to increased inflation and slowing economic growth. Rapidly rising inflation can affect both businesses and consumers' purchasing power, thus the consequences of this conflict can cause significant damage to many worldwide.
The expert notes that so far, financial markets have not reacted very strongly to this conflict, as there has been no panic selling of stocks. "Cryptocurrency prices have also changed insignificantly, but it is likely that the situation will change in currency markets. Since the safest and fairly stable currency is the US dollar, investors, avoiding risks, will choose investments in dollars. It could be expected that the conflict will destabilise the investment portfolios formed by investors," says Dr. I. Danileviciene.
After carefully observing the situation, Dr. Bahman Peyravi from the Department of economic engineering, points out that many experts currently indicate that Iranian and Israeli military actions could have long-term economic consequences and significantly affect global markets. Many of them suggest that "black holes have formed in the world economies," emphasising that what is happening is not just a temporary phenomenon but will create long-term effects. According to Dr. B. Peyravi, the expected fluctuations in gold, oil and dollar markets encourage investors to create new strategies. He is particularly concerned about a significant increase in gold and oil prices possibly contributing to the onset of a new global inflation.
People are choosing safer investments
According to experts, in the case of conflicts and unfavourable geopolitical situations, the safest investment is gold. In the context of economic slowdown and military conflict, investors usually abandon risky investments and opt for safer ones, so it is not excluded that investment in gold will increase, which will consequently increase the price of gold. This is one way to protect investors' money.
According to Dr. Irena Danileviciene, Iran and Israel are not the only countries significantly affecting the world's geopolitical situation. Eventhough the consequences of the conflict can be very serious, there are other factors affecting the situation in financial markets that should also be taken into account.
2024 - Election year. How is it affecting markets?
Dr. Bahman Peyravi from the Faculty of Business Management at VILNIUS TECH points out that during election years, expansionary monetary policy is applied. Global equity funds received $60 billion in inflows during the first quarter of this year. One of the main reasons is that more than 50 countries worldwide are planning to hold elections this year.
"It was expected that central banks, especially the FED, would reduce the interest rate by 160 basis points this year. Regional conflicts and rising energy prices, Brent crude oil starting the year at $75 per barrel and now trading at $90 per barrel, are causing reasonable concern in the financial world. These events may restrict central banks' actions in combating inflation," says Dr. Bahman Peyravi.
The threat of uncontrolled global inflation
According to Dr. Bahman Peyravi, both airlines and shipping are experiencing significant difficulties. Due to the conflict between Israel and Iran, and the conflict between Russia and Ukraine, at least ten airlines, including Qantas, Lufthansa, United Airlines, Air India, among others, are cancelling or changing flight strategies. Due to the potential risk in Iranian airspace, the route between Europe and Asia, airlines have limited alternatives to fly through Turkey, Egypt, and Saudi Arabia.
"Increasing tension, especially in the Red sea, also harms shipping, which inevitably affects the entire supply chain worldwide. Rising energy prices further strengthen Russia's position, whilst weakening the EU and US positions. The escalation of conflicts in the Middle East increases the risk that Iran will close the Strait of Hormuz, threatening complete global energy dependence on Russia, which will lead to skyrocketing prices," warns Dr. Bahman Peyravi about the threats of uncontrolled global inflation.
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