The escalating conflict between Israel and Iran has put global markets on edge, as the risk of a disruption to global oil supplies rises and inflation threatens to reignite.
Investors have started to reprice a range of products, from gold and currencies to oil prices and stocks, amid fears a broader Middle East conflict could take hold.
Here are four market movements to watch out for.
Rising petrol prices
Over the past couple of weeks, oil has climbed from $US62 a barrel to about $US74, reversing a trend that had eased cost-of-living pressures for many households.
Motorists could be paying up to an extra 12c a litre for petrol if the recent jump in oil prices is maintained, according to the chief economist at AMP, Shane Oliver.
There are many moving parts to how fuel prices are set, not least the regular cycles of rising and falling prices that seem to defy the laws of supply and demand.
But Oliver says a rule of thumb is that every $US1 change in the international price for a barrel of oil translates to a 1c rise or fall at the bowser.
It takes a couple of weeks for wholesale fuel costs to filter through to prices at petrol stations, Oliver says. Some analysts suggest oil prices could push beyond $US80 if tensions ratchet higher in the Middle East.
Oil traders are keeping a close eye on any supply disruptions at the strait of Hormuz, a choke point for the global oil trade that Iran has previously threatened to close during times of tension with the West.
Interest rate risks
The rise in oil prices poses a particular problem for Donald Trump’s argument that the US Federal Reserve should lower interest rates, given the president’s plan to lower inflation relies in large part on falling energy costs.
Trump argued just days before Israel struck Iran that prices for everyday Americans were down, with gasoline prices dropping each month since he had taken office.
Any rise in petrol prices in the US, coupled with increased consumer prices caused by tariffs, could help fuel another spike in inflation, making rate cuts less likely.
The impact of oil prices on Australia’s inflation outlook is expected to be less pronounced. Oliver says he does not believe it will cause a big inflationary shock that could see the RBA hold off on its anticipated path of rate cuts.
Bets in financial markets on the timing of RBA rate cuts have not moved much over recent days; they continue to price in three more rate cuts this year, with the first of those at the next meeting in about three weeks’ time.
The global head of investment strategy at Saxo, Jacob Falkencrone, says there are three credible scenarios as a result of the Middle East conflict, all of which could affect interest rates differently.
The scenarios include:
The conflict is contained and energy prices quickly moderate, reducing inflationary pressures.
There is a rapid diplomatic breakthrough, and markets enjoy a relief rally. This could prompt an even faster fall in oil prices.
A regional war erupts, and oil prices surge, prompting central banks to reconsider their rate cut outlook as inflation builds.
Glittering gold
Gold prices have hit record highs, as its safe-haven status entices huge interest from traders seeking respite from economic and geopolitical turmoil.
While the Middle East conflict has pushed the price of the precious metal towards $US3,500 an ounce, it was already soaring before Israel launched strikes against Iran.
In recent months, gold has been viewed as a reliable store of value as confidence in an alternative safe-haven, the US dollar, wanes.
This market trend has been captured by the “sell America” trade, a term that describes investors shifting money out of a range of US assets in response to Trump’s new tariff regime announced in early April.
The trade has also been underpinned by concerns over the broader economic and political outlook in the US, and has generated interest in bitcoin, which is sometimes known as gold’s digital counterpart and is popular among younger investors.
Chris Weston, the head of research at Pepperstone, says the market views the investment case for gold as relatively clearcut.
While the Australian dollar, which is traditionally a proxy for risk, slipped against the greenback immediately after Israel struck Iran, the falls have been muted. Its outlook is now closely tied to whether the conflict escalates or moderates.
The local currency has benefited from the “sell America” sentiment, which has so far limited its falls against its US counterpart.
Volatile shares
Global share markets, including the ASX, have been knocked around by waves of volatility in recent months.
Share price movements have been mixed in the two trading days since the first Israeli strikes.
Gold stocks are up, as are shares in oil and gas companies, including Woodside. Other energy companies, such as uranium producer Paladin, are also surging due to concerns over global energy supplies.
Commodity price increases tend to flow through to a larger tax take in Australia, boosting the federal budget.
Meanwhile, global travel and airline stocks, including Qantas and Flight Centre, are down over concerns there will be a slowdown in bookings due to the hostilities. Investors are also concerned that fuel prices could hurt airline profits.
AMP says the share market “ride is likely to remain volatile in the near term”.
