"Maximum Panic" Moment Still Ahead: Alpine

Image © Adobe Stock

The war in Iran has some weeks to run, and investors should position for more volatility.

An assessment by geopolitical strategists at Alpine Macro warns the Iran conflict is yet to deliver the "maximum panic" moment, and that investors should be ready to take advantage of the opportunities this presents.

"We initially estimated the conflict to last 1-3 weeks, with a maximum of two months," says Dan Alamariu, Chief Geopolitical Strategist at Alpine Macro. "As the war unfolds, we now expect something closer to roughly two months, though the dynamics remain self-limiting."

Alpine Macro is a provider of geopolitical and macroeconomic analysis and is part of the Oxford Economics stable. Analysts there anticipate the conflict will most likely conclude with an informal ceasefire, allowing Iran's regime to survive while all parties claim victory.

Alamariu says markets are expected to experience "maximum panic" within the next 1-3 weeks, as investors digest the possibility of escalation, potential closure of the Strait of Hormuz, and possible disruptions in the Red Sea.

"Oil & gas, out-of-region energy, aerospace & defence, and shipping equities remain the main beneficiaries. At maximum panic, beaten-down Asian, GCC, and European equities become buy-the-dip opportunities," says the strategist.

Despite the Iran conflict reaching the two week mark, markets are proving relatively resilient with major global equity indices a mere 3-4% off their all-time highs.

The dollar has strengthened, but most dollar-based pairs are displaying pullback qualities as opposed to outright trend turns.

"Despite the turmoil of war in the Middle East, it would be fair to say that equity markets remain resilient, e.g. the S&P Composite is hovering only 3% below its all-time high," says Albert Edwards, a strategist at Société Générale.

"It seems the market has gone all-in with the optimistic view of the war, ignoring at its peril the entirely plausible risks of a more prolonged rise in inflation and its consequences," he adds.

Given this, Edwards warns investors should at least be cognisant of this asymmetry and the associated risks.

A new market analysis from Lloyds Bank says market participants are having to assign a bit more weight to scenarios where energy market disruptions and hence elevated prices prove a bit more durable.

Brent crude hovers near the $100/barrel benchmark at the time of writing, while benchmark global gas prices hold onto gains in excess of 30% since the war began.

The closure of the Strait of Hormuz means about 20% of the world's supply of oil and gas has been blockaded in the Middle East.

A report by news agency Axios says President Donald Trump's advisers warn the Iran war could drag on longer if the regime succeeds in strangling the Strait of Hormuz and driving oil prices beyond his tolerance.

For currency markets, the dollar is likely to be the beneficiary of a conflict that lasts longer than many had anticipated.

"Elevated uncertainty keeps USD bid while the conflict persists, particularly against high-beta and energy-importing currencies. A quick resolution allows selective USD selling, but a prolonged war drives broad USD strength, EUR downside," says a note from TD Securities.