According to top economist Mohamed El-Erian, there are major disagreements between investors and security experts over how they assess the risks of the Iran-Israel conflict, which could still pose a significant shock to global growth and financial markets.
In a comment within the Financial Times On Friday, the alliance’s chief economic adviser noted that “both parties crossed several lines” when Iran and Israel directly attacked one another for the primary time.
Last weekend, Iran fired a whole bunch of drones and missiles into Israel, having used proxy militias to attack the country prior to now. And early Friday, an Iranian base was hit by airstrikes that U.S. officials said were an Israeli strike. Israel had previously attacked Iran-linked targets in third countries comparable to Syria.
“Despite all this, the market reaction has been relatively muted and subdued,” El-Erian wrote. “Rather than pricing in the market impact of a sustained escalation in geopolitical threats and a greater risk of significantly higher oil prices in the long term, traders quickly blunted initial moves in many asset prices.”
In fact, crude oil prices are below levels before Iran’s attack on Israel, after briefly rising sharply on reports of an impending attack and immediately following news of the airstrike on the Iranian base. This suggests that the financial markets initially see little risk of the conflict escalating.
In contrast, Some security experts have raised the alarm about the potential for the situation getting worse, although there are signs that either side can have resisted.
El-Erian warned that further escalation between Iran and Israel would weaken fragile global growth, fuel inflation and place further strain on central banks and governments that have already got limited ability to reply to latest shocks.
In particular, the Chinese and European economies, that are heavily depending on energy imports, could be hit hard by higher oil prices. And U.S. inflation would remain stubborn, further delaying the Fed’s rate cuts. Additionally, the U.S. dollar would rise as investors flock to protected havens, and borrowing costs would rise as markets price in additional risks.
“When I compare the market reaction to the views of most national security experts, I remember the story of the frog in boiling water,” El-Erian added, referring to the fable of a frog that ended up in a pot boiled with water that steadily warms up.
The Iran-Israel conflict has “permanently raised geopolitical temperatures in the region,” but financial markets have brushed that aside because the recent back-and-forth has not yet resulted in major casualties or physical damage, he said.
“Given that this is a region prone to miscalculation, insufficient understanding of adversaries and implementation accidents, this may well prove to be an overly complacent response,” El-Erian warned.
