Equities show measured reaction to Israel-Iran war as money managers price in a limited conflict

Brent crude futures ha already touched $77 per barrel last week in a quick, kneejerk reaction, but since then, there has not been a major spike noted in the prices. JPMorgan and Deutsche Bank too have already put out there worst-case scenario that haven't ruled out oil above $100 per barrel, which the futures market has digested.

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The world equity markets may have started to price in the Israel-Iran war as a limited conflict, confined between the two nations, however, the risk to the Strait of Hormuz remains a key unknown, according to several market experts, even as oil and precious metals continued to rise on geopolitical risks, with brent crude futures near $74 per barrel and Comex gold futures close to all-time highs above $3400/oz.

The US index Futures on June 16 are showing strength even as the conflict continues to unfold in the middle east, with Dow jones, S&P 500 as well as Nasdaq futures all showing gains, despite the risk arising out of the conflict. Last week, all three US indices had ended the week on a negative note following the sharp selloff seen on Friday.

Veteran money manager Ajay Bagga told Moneycontrol that the rise in international crude prices so far seems to have reflected a serious but limited threat to Iranian crude supply, with global news reports showing that only its oil storage depots having come under direct threat from Tel Aviv's onslaught, while production capacities have been largely unaffected so far.

"If you look at the Israeli bombing, they have done on fuel depots and the big refineries in Iran have not been struck. So, they are making sure that Iranian exports continue, they are not debilitating that. They are ensuring that locally Iranians don't have access to oil. So, they are hitting fuel depots," said Ajay Bagga.

Brent crude futures have already touched $77 per barrel last week in a quick, kneejerk reaction, but since then, there has not been a major spike noted in the prices. JPMorgan and Deutsche Bank too have already put out their worst-case scenario that haven't ruled out oil above $100 per barrel, which the futures market has digested.

Read More: Israel-Iran conflict is spiraling out of control, putting energy supply chains at risk

"What will happen, I think within this week, you will see that the world starts discounting this conflict. It's not going to end very soon till Israel gets out," Ajay Bagga added. "...when the Gaza ceasefire I and II happened, global markets jumped. So, we are going to see that as well, coming through. Now, when comes, whether this week or in 15 days, you are going to see a recovery."

Back home, Sensex and Nifty 50 are sharply higher on June 16, supported by buying in largecaps, as market participants continued to scout for value to deploy soaring mutual funds SIPs and AUM, as seen in the latest AMFI data. However, businesses exposed to crude oil risk were cautious or lower in trade, while IT index showed remarkable strength on the back of continued buying. The India VIX, near 15 levels, is marginally lower, reflecting a measured caution and not a panic-driven sentiment.

Chirag Mehta of Quantum AMC told Moneycontrol that the conflict is a major risk the supply of oil, but it needs to weigh if the regional war escalates or stays restricted, staying between the two nations only without spiralling out into a wider conflagration. "If conflicts remain restricted or subside, we’ve seen the market impact wear off. Markets can come back to fundamentals and economic reality," Mehta told Moneycontrol during an interaction. "In the short term, we may see an impact, but if patterns remain as they have over the last two to three years, markets will reflect fundamentals again," he added.

Earlier in May, India and Pakistan's border conflict quickly ended in a pause in hostilities, with US President Trump claiming credit for having used trade as a bargaining chip to force India's to cease air strikes, a claim subsequently denied by India. The ongoing Ukraine-Russia war, Trump's tariffs, lingering trade negotiations, IMF in its recent report said that despite the slowdown, global growth 'remains well above recession levels'. Despite these global uncertainties and downward revisions in growth forecasts for other large economies, the IMF said India should maintain its leadership in global economic growth.

Read More: India needs to urgently review energy risk scenarios amid rising Mideast tensions: GTRI

“Markets should be prepared for a prolonged period of uncertainty,” Bloomberg News quoted Wolf von Rotberg, an equity strategist who bet on adding more gold to hedge against the potential risks to world oil and equity market.

Read More: Israel's stock market remains resilient amid conflict with Iran

The Iran-Israel conflict has set the stage for a week that will see US Fed and BoJ consider key policy decisions, along with a summit level meeting of Group of Seven leaders, and market participants will weight if the cues get further complicated.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions