Markets 'in the dark' on Middle-East conflict but moves 'contained' so far

The US attack on Iranian nuclear facilities over the weekend has kept investors on edge, propping up the safe-havens and triggering another move upwards in oil prices.

All eyes are now on the extent of the retaliation from Iran, whether that be through further missile and drone strikes on Israel or a blockade of the Strait of Hormuz.

If successful, the latter would be a significant development for markets, given the high importance of the route for global oil trade, around 20% of which passes through the Hormuz Strait.

We do note, however, that the moves seen in markets have been relatively contained so far today, with the US dollar and oil futures trading only modestly higher.

Investors appear to be clinging onto hopes of a de-escalation, and are perhaps just thankful that Iran’s military response has been limited and that the US attack on Iran seems likely to be a one off, rather than the start of a full-blown war.

At this stage, markets are in the dark as to where we go from here. Suffice to say, an escalation in the conflict would be greeted with another bout of risk aversion, as investors would price in rising geopolitical uncertainty, higher oil prices and possible supply-chain disruption. The US dollar would remain well placed in this environment.