Global investors are just beginning to grasp the possibility that intensifying geopolitical risks may be here to stay, with the near-term risk of an oil shock rising as the U.S. beefs up its military presence in the Middle East.
That’s according to strategist Roukaya Ibrahim of BCA Research, the same Montreal-based firm which came out last week with a forecast of a 70% chance that the Israel-Hamas war could spread beyond Gaza. BCA Research’s geopolitical strategists now see a “subjective 30% risk” that the conflict will expand into oil-producing regions like Iraq, the Persian Gulf and Iran.
Financial markets have largely taken Mideast developments in stride, with investors and traders mostly focused on the lack of any ground invasion by Israel so far and Monday’s release of two elderly hostages by the militant group Hamas. All three major U.S. stock indexes
were higher in New York afternoon trading Tuesday, while 1-
through 5-year Treasurys
sold off — sending their corresponding yields higher. Oil prices headed lower for a third consecutive session, with supplies not yet affected by the Israel-Hamas war. West Texas Intermediate crude for December delivery
was down below $84 a barrel.
The relatively calm posture of U.S. markets stands in contrast to what BCA Research sees as a secular trend of rising geopolitical risks. Those risks stem from a challenge by Russia, China and Iran to “the U.S.-led world order and America’s domestic divisions, which have prevented a coherent strategic response,” according to Ibrahim. And they’re intensifying as a result of Iran’s “proxy war” with Israel, Ukraine’s “faltering” counteroffensive against Russia, Taiwan’s 2024 election, and former U.S. President Donald Trump’s likely nomination as Republican presidential candidate, the strategist said.
“Mideast instability combines with Russian energy weaponization to impose high odds of a significant oil supply constraint on the global economic outlook in 2024,” Ibrahim wrote in a note released on Tuesday. “The Biden administration will seek ways to increase oil production but its options are limited. There is not yet a new US-Saudi strategic understanding, so Saudi Arabia will increase oil production too little, too late, if at all.”
Some have pointed to the 1973 oil crisis as a possible historical reference point and two big names — JPMorgan Chairman and CEO Jamie Dimon and BlackRock CEO Larry Fink — are also drawing some comparisons to the 1970s. However, other experts don’t expect a 1970s-style oil crisis to unfold.
Meanwhile, traditional safe havens like gold
and Swiss assets — have been rallying since Oct. 6, the day before Hamas’ surprise attack on Israel, with the precious metal and the franc proving to be among the top haven performers. Investors have also flocked to Swiss bonds. Gold has jumped roughly 8% between Oct. 6 and last Friday, while Swiss government bonds have produced an even bigger return during that same period, according to BCA Research.
By comparison, regional equity markets, particularly Israel’s, have “suffered,” the firm said. The market-cap weighted return of the MSCI Arabian Markets and MSCI Israel indexes has fallen roughly 4% from Oct. 6 to last Friday, according to BCA Research.
“The different reactions reflect the macroeconomic environment as well as the geopolitical environment,” Ibrahim said.
“However, the geopolitical context will get worse before it gets better, so investors should expect oil and gold to continue appreciating in the short run,” she said. “Over the medium term, high-quality government bonds, including long-dated U.S. Treasuries, stand to benefit from slowing economic growth, disinflation, and geopolitical risk.”