Rising tensions in the Middle East

Highlights

• Following Iran’s massive overnight attacks on Israel, the risk of an escalating direct confrontation between the two countries has been rising strongly and may have tremendous consequences for the region.
• From a global market perspective, the biggest signpost to watch in the near term is the risk of disruption of oil supply, with attacks on Iranian production facilities and intensifying Houthi attacks in the Red Sea well possible, and the tail risk of a closure of the Strait of Hormuz in case of a severe escalation of the Iran/Israel conflict.
• A sharp rise in the oil price may reignite inflation worries. Compared to a year ago, however, the level of energy prices come from a lower level while the disinflation process is much more entrenched. This could mitigate the stagflationary threat from a sharper spike in oil prices.
• Oil prices have risen amid the renewed tensions and equity markets have pared some of earlier gains, though the overall reaction has thus far been muted.

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