Chart of the Week – Move On Up

Welcome to this week’s Chart of the Week.

A client asked about the likely impact on markets of the escalating conflict in the Middle East.

Markets have a way of putting price tags on geopolitics. Whenever tensions rise in the Middle East, traders’ eyes instinctively turn to the oil market. Why? Because, like the butterfly effect, a single event in a key oil-producing region can send shockwaves that ripple across the global economy.

Historically, conflicts in the region have resulted in significant oil price spikes. The 1973 Yom Kippur War (which led to the Saudi oil embargo), the 1990 Gulf War and the 2003 Iraq War all triggered notable jumps in the oil price.

Higher oil prices act like a stealth tax on consumers, pushing up costs for everything from transportation to heating. It’s plain to see from the chart below how this feeds directly into inflation, the economic bogeyman we thought was easing. Central banks, already navigating a narrow path between growth and price stability, are watching carefully. Historically, oil shocks have made it more difficult to control inflation, forcing central bankers to raise interest rates to fight inflation even when growth is sluggish.

So, as the conflict unfolds, oil becomes the key variable to watch. If the oil price rises and stays elevated, we could see a repeat of past cycles where inflation stayed stubbornly high, ultimately influencing interest rates and even stock market returns. The lesson from history? Conflict in oil-rich regions can turn a local crisis into a global economic story, with impacts that linger long after the headlines fade.

The oil price rose after comments by US President Joe Biden on Thursday about possible Israeli strikes on Iranian oil facilities. However, prices remain lower than they were earlier this year – and they are still a long way from a level that would have a significant impact on inflation.

Key Takeaway: Geopolitics may be unpredictable, but their impact on markets tends to rhyme with the past. So, the oil price is the thing to monitor.

Have a great week,

Nathan Sweeney, Chief Investment Officer of Multi-Asset

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