Market Musings 290625: Stocks shrug off MidEast conflict
Investment Strategy Podcast:
Our 2025 Investment Themes Mid-Year Update
In this podcast, Edmund Shing, Global Chief Investment Officer and Guy Ertz, Deputy Chief Investment Officer, unveil the mid-year update of their 2025 Investment Themes.
Where is the market stress?
Over the last couple of weeks or so, world news headlines have been dominated by the escalation of the Iran-Israel conflict, including the surprise 22 June US attack on Iranian nuclear facilities including the Fordow site.
Market reaction to this conflict has calmed in recent days thanks to the announcement of a ceasefire, which though fragile, seems to hold for now. The Brent crude oil benchmark initially rose over 20% to $79/barrel, before then easing $11 to $68. Note that oil prices are thus still far below their levels of a year ago, driving headline inflation lower.
Brent crude oil remains in a long-term downtrend despite the conflict
Equally, oil price volatility as measured by the OVX index spiked initially before easing lower…
OVX oil price volatility has eased post ceasefire
Given the very short time that the oil price remained elevated, we should not expect a significant impact from the conflict on petrol and diesel prices at the pump. Hence little long-term impact should be seen either on global economic growth or on inflation rates - this would require oil prices to stay at even higher prices for an extended period, which is so far at least, not the case.
Ultimately, the global oil market remains well-supplied with no major disruption to oil shipments e.g. through the Straits of Hormuz. In addition, Saudi Arabia and the United Arab Emirates together have 6 million barrels/day of oil production capacity that they can bring online rapidly if Iranian oil supplies were disrupted.
Measures of financial market stress such as the VIX volatility index (for US stocks) and the US high yield corporate bond (credit) spread have actually declined to levels that suggest market complacency - certainly little evidence of higher-than-average risk being priced into these markets.
VIX volatility index declines to 16
US high yield credit spread returns close to year…
