Oil Climbs as Israel-Iran Conflict Amps Up Risks: Markets Wrap

(Bloomberg) — Oil climbed early Monday with investors squarely focused on escalating geopolitical tensions as Israel and Iran continue to bombard each other with no sign of a pause.

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Brent crude rose as much as 5.5% in early Asian trading after Israel and Iran continued attacks on one another’s territories over the weekend. Israel launched an attack on the giant South Pars gas field in the Persian Gulf, forcing the shut down of a production platform, after air strikes on Iran’s nuclear sites and military leadership last week.

S&P 500 futures slipped, while Asian equity-index contracts pointed to declines in Hong Kong and Sydney, and a gain in Tokyo. The dollar saw modest gains against major peers in early trading.

Last week’s biggest market reaction to the conflict was oil, with crude prices surging more than 7% on Friday on concerns the conflict might widen to cause disruptions in a key oil-producing region. Traditional haven assets such as gold and the dollar also rose, although fresh inflation fears undermined Treasuries.

“Markets should be prepared for a prolonged period of uncertainty,” said Wolf von Rotberg, an equity strategist at Bank J. Safra Sarasin. “Hedging against potential oil supply-chain disruptions via exposure to the energy market and adding to gold, which may see an acceleration of its structural uptrend, are the best ways to protect a portfolio against a further escalation in the Middle East.”

Some investors ended last week choosing to wait to gauge how long the tensions would last, mindful of similar standoffs between the two nations that eventually de-escalated. Still, the extension of the conflict and intensity of the current hostilities is likely to cast a shadow over risk assets on Monday. Already, the MSCI World Index of developed-market equities fell the most since April on Friday following Israel’s initial air strikes on Iran.

“This is a significant escalation, to the point where these nations are at war,” said Michael O’Rourke, chief market strategist at JonesTrading. “The ramifications will be larger and last longer,” with weakness in equity markets likely, especially after recent gains, he said.

Regional Risks

In the region, most Middle East stock indexes dropped on Sunday. Egypt’s main gauge was the worst performer, seeing the biggest losses in more than a year on concern that a halt in Israeli gas production will cause fuel shortages. In Saudi Arabia, the Tadawul gauge’s declines were limited by Aramco, which gained on higher oil prices. Israel’s benchmark ended higher as military supplier Elbit Systems Ltd. rallied.