The difficult task of determining the price of the (possible) Apocalypse | Financial markets

In a market where attention spans are getting shorter, there are two issues that remain on investors’ agendas month after month for two years: interest rate trends and geopolitics. Iran’s attack on Israel and doubts about Tel Aviv’s response (and the possible consequences of that response) have revived fears about grand political, diplomatic and economic games.

“All our clients ask us about this, but we cannot make forecasts, we can only work with scenarios. If such an event occurs, the main consequences will be; If this other one happens, the consequences will be different,” explains the investment bank analyst. “The big question is the price of oil, as it affects both economic growth and inflation,” he adds.

However, the price of Brent, the usual thermometer of tensions in the Middle East, remains stable at around $90, not far from the level it was before the Oct. 7 Hamas attack. Now, since the price is affected by production cuts imposed by OPEC+ (traditional OPEC+Russia), the indicator may not be as reliable. The stock fell, but not too alarmingly.

In stocks, the S&P 500 lost about 3.5% after warnings of an imminent attack were sounded last Thursday. It is down less than 5% from all-time highs. Given that the market is not exactly cheap, it does not appear that panic has spread.

However, if you look a little more closely, some alarming points emerge. The VIX index, which measures implied volatility in the S&P 500, rose to a six-month high. This index measures the price of options on that index; Since an option protects against a stock’s decline (or rise), the market’s demand for coverage for it indicates the perception of risk. That’s why it’s called the “fear index.”

The VIX rose from 12.5 at the end of March to nearly 20, its highest level in six months. Indeed, according to some analysts, as we have already mentioned in these lines, a change in investor habits could lead to a decline in this indicator. Bias or lack of bias, investors are willing to pay more to protect themselves from market fluctuations.

In addition, volumes have increased sharply. Total volume of S&P 500 options traded last Friday reached its highest level since 2018, according to Bloomberg data. According to the Financial Times, demand for put options surged when the trend in early 2024 was the opposite: investors were buying call options to avoid missing out on possible market gains.

However, it is difficult to know to what extent this trend is due to uncertainty over geopolitics or interest rates, as the confrontation between Iran and Israel coincided with economic indicators that delayed the interest rate forecast. United States. “The options market has become more active since the stock market thaw was paralyzed by geopolitical fears and inflation,” said Bloomberg Intelligence analysts, who point to the rise of options hedging to protect against tail risk (a low-probability risk with high consequences). . consequences).

Options writing on the S&P 500 index has increased sharply, with an increase in the number of put contracts.

However, Citi analysts are assessing the impact of geopolitics on the market. “Looking at historical correlations, geopolitical turmoil appears to have a negative impact on stock prices, but the effect tends to be short-lived and reverses relatively quickly. Surprisingly, this pattern also tends to hold true for oil prices, which often focus on geopolitical events, with the exception of two or three risky rallies.”

In fact, the firm’s calculations show that stock markets typically rise a year after conflicts begin, despite some initial volatility. But there are some exceptions when geopolitical risks catalyze energy crises. “In these cases, the resource industries have outperformed,” he concludes.

In other words, the risk that markets face is the risk of an energy crisis; Geopolitics alone does not seem to be able to move the market forward. And today, although the crisis in the Middle East is serious, at the moment the tension has not spilled over into the commodity sector. Thus, the fall in the markets has been contained for now: there are no prospects for an increase in the shortage of crude oil. In any case, the international situation suggests putting an end to our beards. The blockade of the Strait of Hormuz, the main route for hydrocarbon exports from the Persian Gulf, is likely a tail risk that investors are wise to guard against. The Russian gas shutdown has already caused a brutal economic and financial storm in Europe two years ago, and it’s not just oil tankers passing through Hormuz; It was the route of ships carrying liquefied natural gas from Qatar that helped mitigate the consequences of the Ukrainian war.

According to Citi, the current situation, even before the Middle East crisis, was the most geopolitically sensitive since the great financial crisis of 2008-2009. And Spain will become the Western market most exposed to geopolitical turbulence, second only to China and far ahead of other neighboring economies such as Germany or Italy.

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