Iran-Israel War: Check Out The Impact on Market, Oil and Gold Prices

Tensions in the Middle East have escalated, particularly due to the Iran and Israel war, raising fears of a potential regional crisis. Should the situation deteriorate, global crude oil prices—especially critical as Iran is a major oil producer—could see significant fluctuations.

Impact on Oil Prices Due To Iran- Israel War

As of Thursday, oil prices have risen for the third consecutive day, with Brent crude nearing $75 a barrel. A sharp increase in oil prices may complicate central banks’ plans to cut interest rates, as higher inflation could challenge economic recovery.

This rise in crude prices could adversely impact investor sentiment in emerging markets like India, which imports 80% of its oil. With Indian stocks already trading at premium valuations, prolonged conflict may drive global investors to reassess their positions, potentially diverting capital away from India—currently one of the world’s top-performing stock markets—toward safer assets like bonds or gold.

Iran has recently launched approximately 180 ballistic missiles at Israel, targeting military bases and security installations in retaliation for the deaths of key figures from Hamas, Hezbollah, and Iran’s military. Iran has threatened further strikes if Israel responds, while Israel is preparing a substantial counterattack, potentially targeting Iran’s oil production facilities.

Historically, war leads to unpredictable outcomes, complicating assessments. In times of uncertainty, investors often seek to minimize portfolio volatility by reallocating to safer assets.

This year, foreign portfolio investment (FPI) inflows into Indian equities have surpassed ₹1 lakh crore, reflecting global investor confidence despite high stock valuations. However, experts caution that escalating tensions could reverse this trend, negatively impacting global trade and oil prices.

A sustained conflict might prompt foreign investors to reconsider their strategies, potentially withdrawing capital from India in favour of more stable investments. Nevertheless, recent trends show that when foreign investment retreats, domestic inflows often compensate, helping to stabilize the market.

Impact on Gold Prices

Gold prices have surged to new heights this year, driven by factors like central banks diversifying away from the dollar, institutional investors adjusting their portfolios, and strong retail demand for jewellery. Despite rising tensions in the Middle East, gold prices have shown limited movement due to robust U.S. labour data, which has tempered expectations for looser Federal Reserve monetary policy.

The global monetary easing cycle, initiated months ago, has seen central banks cutting interest rates after a long period of high rates aimed at combating inflation. While these cuts were intended to spur economic growth, the ongoing Iran-Israel conflict poses a significant threat to recovery.

Concerns are mounting that the conflict could escalate further, potentially involving major nations and severely disrupting global trade and supply chains. The interplay of geopolitical risk and economic uncertainty may compel central banks to reassess their strategies, possibly delaying further rate cuts or even reverting to tightening monetary policies in response to inflationary pressures from rising oil prices and trade disruptions.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.