Were market reactions to U.S. tensions with Iran a flash in the pan?

When news hit that the U.S. military had carried out an attack that killed Qasem Soleimani, the major general of Iran’s Islamic Revolutionary Guard Corps, institutional investors watched as markets saw something of a flight to safety.

Gold is currently hovering near a five-year high. Brent crude spiked to close to US$71 off the back of the announcement, but dipped again soon after. Other traditional safe havens like the Japanese yen and U.S. treasuries also swelled. Meanwhile, the S&P 500 reacted mildly to the downside and has trended higher since, while the S&P TSX composite index barely flinched.

“You saw, right after the event itself, the knee-jerk reaction of gold and oil higher and risk assets selling off,” says Bill Callahan, an investment strategist at Schroders. “Within not even 24 hours, it had pretty much reversed.”

Read: Geopolitics becoming a primary market driver for institutional investors

Of course, short-term volatility can come from any number of sources. But while geopolitical risk has been much discussed as a primary risk driver by institutional investors, military conflict hasn’t played too heavily into that conversation.

“In our view, investors should actually be using these types of disruptions as a possible entry point to add to positions they like that sell off,” says Callahan.

While tensions ramped up quite quickly, Iran’s overall response to Soleimani’s death was relatively measured and markets breathed a sigh of relief, he says. “It’s very obvious to us that Iran does not want a hot war with the U.S. And it’s also somewhat obvious to us that the U.S. administration would not want to get into a ground war with Iran, especially when you have a war-weary populace in the U.S. and a presidential election approaching.” 

Read: Are institutional portfolios prepared for the next market tumble?

However, Callahan cautions there’s some risk to oil prices, in that Iran could take action to push them higher, potentially grinding the global economy towards recession. But it’s unlikely Iran is prepared to go that far, he adds. 

“Iran’s ability to actually push prices up is fairly limited. They would have to directly attack oil assets and ports. There’s no way they could shut down the shipping lanes without the U.S. fleet quickly pushing them out. And so they would have to directly attack infrastructure and we don’t think they’re prepared to do that.

“So, our opinion is that oil prices will continue to slowly grind higher, due to this cyclical recovery, not due necessarily to geopolitical tensions.”

Read: How are trade jitters, geopolitical risk affecting equities?