Forex and stock markets are usually driven by central bank interest rates, but recently, geopolitics and oil prices have taken the lead. Interestingly, this has not changed investors’ long-term bullish outlook. The S&P 500 has posted double-digit gains in each of the past three years, reinforcing the habit of buying every dip. Donald Trump appeared to offer just such an opportunity, saying the war with Iran is progressing faster than expected and could end soon. As a result, investors rushed back into the market, driven by FOMO, the fear of missing out.
The lifeline from the US president shifted markets from fear to greed. Until then, the Polymarket and Kalshi betting markets indicated that the armed conflict in the Middle East would continue until May. According to Capital Economics, in this scenario, oil could rise to $150 per barrel, then fall back and stabilise near $130. High oil prices led Yardeni Research to increase the odds of an S&P 500 crash by the end of the year from 20% to 35%. Meanwhile, JP Morgan has become a tactical bear.
In reality, a peace agreement would require consensus from both sides. Iran says it is reluctant to engage in talks with the United States after negative experiences during negotiations last summer and again this past winter.
Stock markets rallied late on Monday. The conflict in the Middle East has already wiped out around $6 trillion from global equity markets, but rumours of peace are now lifting investor sentiment. However, a Bloomberg source within the US administration says Donald Trump does not intend to end the conflict without achieving a significant victory and is surprised by Iran’s reluctance to surrender.
The longer the confrontation continues, the higher oil prices are likely to rise. That increases the risk of stagflation, a mix of slowing economic growth and rising inflation. This environment is particularly unfavourable for stock markets. Without concrete steps to resolve this, the S&P 500 and the Nasdaq Index are likely to remain under pressure.
The FxPro Analyst Team