Iran war: Look beyond stocks to understand state of economy, experts say | US-Israel war on Iran News
Oil Prices Surge Amid Renewed Tensions in the Middle East
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The ongoing conflict between the United States and Israel against Iran has intensified, leading to a significant rise in oil prices and prompting economists to look beyond surface-level market indices for insights into the economy’s state.
Michael Klein, a professor of international economic affairs at Tufts University’s Fletcher School, noted that market activity has shifted markedly since hostilities in Iran escalated. “The markets have been relatively quiet over the past month or two, but dynamics have changed since the onset of the war,” he said.
Since late February, the yields on 10-year U.S. Treasury bills have increased by nearly 60 basis points, reaching 4.6 percent— the highest level in a year. This surge indicates rising inflation expectations and represents a tightening of borrowing costs for businesses, potentially dampening economic growth.
“The interest rates on bonds reflect inflation concerns,” Klein explained. “Lenders need assurance that their returns account for the erosion of purchasing power due to inflation.”
The strategic Strait of Hormuz, a crucial transit route for 20 percent of global oil supply, remains largely closed following a temporary relief period after a U.S.-Iran ceasefire agreement. This closure impacts market supply and investor sentiments.
After the ceasefire agreement was signed on June 17, consumer prices saw a monthly decline of 0.4 percent in June, primarily driven by a 9.7 percent drop in energy costs. However, oil prices rebounded, with benchmark Brent crude approaching $91.42 a barrel on Sunday before settling at $88.04 on Monday. The national average price for gasoline in the U.S. is now $4 per gallon, up from $3.87 a week prior.
Klein observed that investor reactions are influenced by fluctuating political rhetoric, particularly from former President Trump regarding the conflict. According to the CME Group’s FedWatch tool, traders currently anticipate a 55 percent likelihood of a quarter-percentage point interest rate hike by the Federal Reserve in September.
Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security, remarked on the changing expectations in oil markets. She noted recent optimism about oil flows has shifted into concern as the ceasefire agreement faltered, leading to rising prices again. “Short-term supplies are diminishing, causing a ripple effect in pricing,” she said.
Additionally, global refining capacity has been hampered due to damage from hostilities in the Middle East and disruptions in Russia from Ukrainian drone attacks. “Prices of oil products like gasoline and diesel are experiencing shortages relative to crude oil,” Ziemba noted, indicating that consumers are likely to feel the effects at the pump.
Amid these developments, the S&P 500 has fallen 0.81 percent over the past month, while the Dow Jones Industrial Average has experienced a slight increase of 0.53 percent, marking ongoing market volatility. Mariano Torras, chair of the finance and economics department at Adelphi University, pointed out the potential for severe global food security issues tied to rising energy costs, particularly affecting developing nations as they approach planting seasons.
“We may be facing a grave situation,” Torras warned, yet stock markets seem unperturbed. He attributed this to a prevailing assumption that government interventions will mitigate any significant economic shocks, similar to responses seen during past crises.
Klein echoed this sentiment, cautioning against placing too much emphasis on short-term market fluctuations. “Markets reflect collective perceptions and can be influenced by crowd behavior,” he said, referencing economist John Maynard Keynes.
As tensions continue to escalate, the potential for economic repercussions remains a primary concern among experts.
