Global investors, who entered 2024 uncertain about the duration of stock market rallies and the timing of rate cuts by central banks, may decide to reduce their risk exposure as a result of the abrupt escalation of the Gaza conflict.

Following the movement’s attacks on ships in the Red Sea, the United States and Britain announced on Friday that they were striking Houthi military targets in Yemen. This news originally caused market reactions to be muted.

But following the strikes, U.S. Treasuries and stock markets stiffened, and oil prices rose.

As they wait to see how the Middle East scenario evolves, particularly the disruption to oil supply and trade, investors will be looking to cut exposure to risky areas and increase their holdings in safe havens, according to analysts.

“Markets are on edge as risks of an escalation have risen,” said Charu Chanana, head of currency strategy at Saxo in Singapore.

“It will be particularly important to watch any further actions from either side especially going into the long weekend for the U.S., and particularly the threat of a wider regional conflict. With near-term focus on geopolitical escalation risks, yen and gold could see safe-haven buying.”

The likelihood is considerable. The United States and Britain have launched their first strikes on Yemeni soil since 2016, up the ante in the Israel-Hamas conflict that has been raging since October.

The Houthis, who govern a large portion of Yemen and are affiliated with Iran, have been assaulting ships traversing the Red Sea for weeks, claiming that their actions are a reaction to Israel’s conflict in Gaza.

The Houthis have pledged to retaliate to any attack, despite Washington’s claims that there was no intention to escalate tensions.

A commander of the Iranian Revolutionary Guards threatened to close the Mediterranean Sea in December in response to the US and its allies’ ongoing “crimes” in Gaza.

According to Khoon Goh, head of research for ANZ in Asia, freight charges have already increased in the last several weeks as a result of the shipping interruptions.

“If this strike is able to resolve the issue and shipping lanes can be secured again and things normalise, then that’ll be positive as we’ll see a normalisation of freight rates,” he said.

“The concern is that if this starts to escalate…which will cause a potential spike up in oil price in particular, and further disruptions in shipping lanes.”

Around 12% of global traffic passes through the Suez Canal, and weeks of disruptions there have already harmed firms.

According to a report released on Thursday by the German economic institution IfW Kiel, there was a 1.3% decrease in global trade between November and December 2023 due to a decrease in cargo quantities moved in the Red Sea region due to militant strikes.

Shipping behemoths like Hapag-Lloyd and Maersk have begun sending their ships around the Cape of Good Hope in South Africa on lengthier, more costly voyages. The German logistics behemoth DHL Group has recommended that clients handle their inventory in a different way.

The extent to which gasoline and shipping costs increase influences market expectations of a stock market rally more directly. These expectations are predicated on the belief that the U.S. economy will avoid a recession and that this year will see rate cuts from the Federal Reserve, European Central Bank, and other international institutions.

“There will be a shift back towards risk aversion. This hasn’t fully blossomed out into a proper risk-off mode,” said Rob Carnell, head of Asia-Pacific research at ING of the air strikes.

“I think people are looking for a little bit of safety at the moment. So I think the bond market’s probably the clearest indication of where things are going.”

Brent futures data shows that oil prices have increased by 9% since mid-December and have increased by 2.0% to $79.00 per barrel on Friday. Bond yields and gold were both more subdued.

The yield on a ten-year Treasury scarcely moved, remaining at less than 4%. In roughly two months, their yields have dropped by a full percentage point due to expectations of rate reductions.

“A significant escalation is likely to have notable market impact,” said Josh Crabb, head of Asia-Pacific equities at Robeco in Hong Kong, but “the probabilities are hopefully low.”

(Adapted from USNews.com)

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