War And Peace – And Markets

War And Peace – And Markets

about 4 years ago3 mins

In what’s been far from the smooth start to the year investors were hoping for, 2020 began with escalating US-Iran tensions – and investors looked nervous as stocks, oil, and gold all experienced their fair share of volatility.

🕰️ Recap

  • US sanctions on Iran over the last few years risked disrupting both the oil supply and the Iranian economy
  • OPEC – the world’s major group of oil-producing nations – agreed to lower oil output to help curb oversupply
  • The world’s largest oil company, Saudi Aramco, completed its initial public offering late last year
  • And at the start of this one, a US airstrike on Iran shook stock markets and investors alike

🔗 Connecting The Dots

The US has a history of sanctions on Iran dating back to the 1970s. The most recent of those were in response to Iran’s development of nuclear capabilities, which – in light of current and historical tensions – gave the powers that be cause for concern. Those tensions escalated further in 2018, when the US announced it’d withdraw from the previously agreed nuclear deal with Iran.

The American airstrike that killed a top Iranian general – and Iran’s subsequent response – marked a new peak in the countries’ troubles, sparking fresh investor worries. Given how important the Middle East is to the world’s oil supply, it’s perhaps no surprise that the threat of disruption to the region initially sent the commodity’s price up as much as 4%. Likewise, risk-averse investors turned away from stocks and toward precious metals like gold – the price of which hit a new record high.

Investors worried that higher oil prices would make everything from plastics to gasoline more expensive, which could discourage spending by companies and consumers alike. That’d crimp both profit and economic growth. But those fears soon disappeared, likely as investors realized American energy prices hadn’t moved by much. The country is, after all, the world’s largest oil producer, and it extracts more than it needs.

🥡 Takeaways

Last week’s de-escalation came as a relief to investors in stocks, who sent US shares to record highs (again). Some investors believe they may yet rise further still on the back of at least one rate cut this year, despite the US Federal Reserve having said there wouldn’t be any in 2020. That would lower borrowing costs and should encourage spending, which would boost corporate profit, economic growth, and, by extension, stock prices.

The last few years have shown how damaging geopolitical uncertainty can be for economies, companies, and investors. The US-China trade war, for instance, has cost American companies more than $34 billion – and the stock market might’ve been even higher if it weren’t for those lost earnings. And the UK’s protracted Brexit negotiations have, according to Bloomberg, cost the British economy $170 billion so far, and will cost another $90 billion this year.

🎯 Also On Our Radar

Last week, several British companies cautioned that they’d fallen short of investors’ expectations for revenue growth over the holiday season. But on Friday, Ryanair showed the Irish aren’t about to follow suit. The airline said it’d enjoyed happy holidays thanks to an uptick in sales from customers who booked last minute – and it now expects its annual profit to be higher than it’d promised.

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