What was supposed to be a quick sprint is turning into a marathon. Despite ongoing talks, we’re already in week five of the U.S. “special operation” against Iran, and activity in the Strait of Hormuz remains well below normal levels.
Thanks to TACO, markets haven’t panicked yet, but it’s fair to say they’re far from calm. Since the start of the year, the S&P 500 index has dropped nearly 8%, XAUUSD and XAGUSD remain under pressure, while yields on 30-year Treasury bonds have climbed to around 5%, driven by inflation fears linked to the conflict in the Middle East.
And the worst may still be ahead.
If the U.S. launches ground operations against Iran, the conflict could escalate further, with the Houthis potentially stepping in to disrupt key routes in the Red Sea. That would put vital energy supplies beyond the Strait of Hormuz at risk and add more pressure to already fragile global supply chains.
In the meantime, the macro backdrop is starting to crack. March data showed a synchronized slowdown in business activity across the U.S., Europe, Australia, Japan, and India, according to S&P Global.
At the same time, cost inflation is picking up, raising the risk of stagflation. This means that while central banks will likely respond by tightening policy, they’ll do so carefully, aware of the growing downside risks.
Even if an agreement between Iran and the U.S. is eventually reached, the impact on growth and inflation is already being felt, and central banks will have to factor that in.
So, while markets might rally on news of a resolution, the negative effects won’t disappear overnight. Jumping fully into a “risk-on” mode immediately may not be the best move. That said, gold — which has struggled in recent weeks due to rate hike fears — could be one of the assets to benefit.
Leave a Reply