Weekly Comment: Markets breathe sigh of relief on Middle East ceasefire

Market overview – Richard Carter, Head of Fixed Interest Research

The announcement of a ceasefire between Israel and Iran has been welcomed by financial markets, marking an end to nearly two weeks of escalating conflict in the Middle East. Stock markets moved higher on Monday when the news broke, as the price of oil and gold declined.

Oil price the main transition mechanism into financial markets

US strikes on Iranian nuclear facilities over the weekend caused some concern among investors, sending Brent crude oil above US$80/bbl (per barrel) after trading around US$60/bbl at the start of June. However, the market experienced its largest drop since August 2022 on Monday after it became apparent that tensions were cooling and the situation was de-escalating, with the price falling back to around US$70/bbl. An Iranian attack on America’s biggest air base in the Middle East was forewarned and no one was reported as injured or killed. The retaliation was seen as a minor aggression compared to some of the possible options — such as blockading the Strait of Hormuz — and appears to have been a face-saving parting shot rather than a ratcheting up of the conflict.

Stocks recover on truce agreement

The Middle East contributes a low single digit percentage to global GDP and of the countries in the region, only Saudi Arabia and the UAE feature in the MSCI Emerging Markets Index with4% and 1.5% weights respectively.

US stock futures opened around 1% lower on Sunday evening but ended up nearly 1% on Monday and at their highest level since February. Gold fell as the de-escalation became apparent, as investors sold out of the perceived safe-haven asset. US bond yields fell as news of the ceasefire broke, with the reduced inflation risk (due to the sizable fall in the oil price) seemingly outweighing the impact of the unwinding of flight-to-safety flows.

While recent developments are welcome, sadly, history tells us that a lasting peace may be fragile. Therefore, looking at how financial markets have reacted to previous conflicts where there has been a significant threat to energy infrastructure can provide some historical context. Although past performance is not a reliable guide to future performance, and in each instance the macroeconomic backdrop has differed, the reactions of certain assets has not always been easily assumed or predicted. In most cases, there tends to be an initial spike in energy and precious metal prices that then pares back over the subsequent weeks or months.

Past conflicts show little long-term impact

When Russia first invaded Ukraine in February 2022, oil prices initially spiked approximately 30% before falling back and by the end of 2022, the oil price was 20% below the pre-war level. Gold prices rose around 8% in the near term but were back to the pre-war level within a couple months and had fallen by 15% by mid-September.

A similar pattern was seen at the start of the Gulf War (Aug 1990 – Feb 1991): oil prices rose 80%, before falling to 15% - below the pre-war level - by the time of peace. Gold prices rose 11% but then fell back to the pre-war price by mid-October and were down by 3% by February 1991.

When the US and its allies invaded Iraq in March 2003 however, the pattern was somewhat different in that both oil and gold prices had seen large falls in the weeks leading up to the invasion. Oil prices had fallen nearly 30% over the week prior to the invasion before subsequently recovering somewhat by the end of 2003. The gold price fell 13% from a peak in February 2003, before falling a further 3% after the war began, before climbing by 15% by May.

Performance post conflicts shows the need for diversification

Looking at these past conflicts, it appears that while the oil price has risen in the short term, over time there is little lasting effect. While gold is seen as a hedge of geopolitical risk, its 1-month returns are not that strong and underperform US and UK stocks in two of the three instances. Longer term, US and UK stocks have outperformed gold as seen by the 12 months chart.

As with any period of increased uncertainty, it is important to remember the significance of a well-diversified portfolio, with exposure to a broad range of return drivers being the best preparation for any potential future volatility. The inclusion of alternative asset classes such as hedge funds can be beneficial in such times, especially if inflation expectations begin to rise again and government bonds do not necessarily act as a traditional safe haven.

Weekly economic announcements:

Last week the MSCI All Country World Index (MSCI ACWI) declined 0.4% (+6.4% YTD).

United States:

In the end, US stock indices ended last week little changed, down 0.1% (+2.1% YTD), after positive and negative news on the conflict in the Middle East. Growth shares underperformed value shares while small caps outperformed large caps. Tech stocks managed to eke out a small gain, rising 0.2% (+1.1% YTD).

The Federal Reserve meeting kept the federal funds rate at the current level of 4.25%-4.5%, as expected. This was the fourth consecutive monetary policy meeting at which the rate was left unchanged. Policymakers expect two 25 basis points (0.25%) cuts by year end, in line with their previous communication. Inflation and unemployment forecasts were revised higher while growth expectations declined.

United Kingdom:

UK stocks declined 0.8% last week (+9.6% YTD), with mid-caps broadly flat (+4.4% YTD). The Bank of England rate decision saw no change, with the base rate kept at 4.25% after a 25 basis point cut in May. There was a 6-3 split among policymakers, who hinted at a possible August cut following softening employment data.

The pound ended the week down slightly at US$1.35. The 10-year gilt yield declined 1 basis point, ending at 4.54%. 

Europe (ex UK):

European stocks fared worse than peers last week, decreasing 1.6% (+8.3% YTD). Germany indices fell 0.7% (+17.3% YTD), French stocks declined 1.1% (+5.7% YTD) and Italian bourses declined 0.5% (+18.4% YTD).

There was a sharp rebound in the German ZEW economic sentiment index, which climbed to 47.5 from 25.2 in May, boosted by the governmental approval of a large tax relief package.

The euro ended the week around the same level it began, at US$1.15.

Approver: Quilter Cheviot, 25 June 2025  

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