The markets remained relatively stable at this morning's open despite weekend news that the US bombed three nuclear sites deep within Iranian territory. Historically, such events have precipitated a short term market sell off and a spike in oil prices. But while oil is higher, the markets remain calm today.
The equity markets have been volatile in recent months, so investors should not take this lack of movement as a permanent feature. But clearly, investors are looking past this activity and see little impact on companies, economies or even interest rates at this juncture.
The market doesn't always get this right, of course, and investors often overreact to events, taking a "shoot first, ask questions later" approach. Today, investors have collectively weighed available news and think that Iran's options are limited, and the financial impact of this action will be modest. In fact, there may some element in market action that reflects a reduced global risk posed by a nuclear armed Iran.
One option that Iran does have is to close the Strait of Hormuz, a major shipping route through which 20% of the world's oil is transported. Analysts argue, however, that such a move would accomplish little and starve the Iranian economy of much needed revenue. It would antagonize Iran's trading partners, especially in Asia, not to mention the US, who could militarily target Iranian oil infrastructure. In short, observers give this a small probability.
So while tomorrow may bring another event, until oil supplies are materially affected, it appears that the market impact will be generally contained.
As always, we welcome your thoughts.