Macro views
Macro views

Geopolitical developments: A sustained market impact?

Quick takes on capital markets

October 13, 2023 | 2 min read

While the direct market impact of geopolitical conflict is typically short lived, the macro impacts can often linger. The key macro concerns from the developments in Israel lie with the threat of upward pressure on oil prices, and how its corresponding effect on core inflation could potentially prompt central bank action.

Global oil prices
WTI and Brent crude, oil price in USD, January 2000–present

Line graph

Source: Bloomberg, Principal Asset Management. Data as of October 9, 2023.

Following the horror of the Hamas-led attacks in Israel, global investors are contemplating the potential impact on broad investment markets. While geopolitics typically has a short-lived direct market impact, the indirect impacts via inflation and economic growth can be more persistent.

The critical macro concern lies with the oil market reaction. Brent crude prices have not risen materially, but a significant escalation in tensions would likely apply further upward pressure. Global economic growth is by no means immune, but the fall in global energy intensity in recent decades implies a smaller growth impact than in the 1970s. As a net oil exporter, U.S. economic growth is also less vulnerable.

The inflation risk from spiking oil prices is more pertinent. While policymakers will likely look through these developments in the near term, higher oil prices can work their way into core inflation and inflation expectations if sustained, demanding central bank action.

Safe haven flows have contributed to a sharp fall in bond yields this week. Yet, if oil prices rise further and price pressures do re-emerge, expectations of additional monetary action from policymakers could threaten a renewed bond rout.

In light of the situation in Israel, it is prudent for investors to maintain a diversified portfolio across different asset classes, with a particular emphasis on high quality and defensives.

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