Why stock markets have overreacted to US-Iran tension

Do traders in stock market today remember the drone attack on Saudi Aramco’s oil facility in September 2019? It was the first such major strike, allegedly from Iran soil, against one of West Asia’s most powerful country. However, after an initial knee-jerk reaction, calm returned to global stock markets, and they even hit new record levels in the following weeks.

The US killing of Iranian Major Geneneral Qassim Suleimani in an air strike is somewhat similar event for the stock markets currently.

Also read:Top Iranian military commander Qassem Soleimani killed in US air strike

India’s benchmark equity index Sensex and Nifty have seen a fall of more than 1 per cent, without any other major news other than the US-Iran tension. The Sensex fell nearly 700 points and Nifty was down over 200 points.

A key reason for this is the expectation of a sharp rise in global crude oil prices, which could hurt India badly, as the nation is one of the world’s largest importer of the commodity. Also, traders fear flight of foreign capital. However, as Goldman Sachs Group said in its report, the risk of a sharp up move in the oil prices is only when there is a major supply disruption, and the global financial major does not see any such risk currently.

Also read:US-Iran tension is unlikely to keep crude oil prices up: Goldman Sachs

Also, the small and mid-cap stocks in India are still trading near their record low levels seen in past 21 months, and a further steep push downwards seems unlikely on such geopolitical news have become a norm every three-six months.

“Price risks for Brent, which has surged about 6 per cent since the US strike killed a top Iranian general, are skewed to the downside in the coming weeks without a major supply disruption,” a note from Goldman Sachs on January 6 said. As per Bloomberg , oil was already trading above the bank’s fundamental fair value of $63 a barrel prior to the attack.

The situation resembles Saudi drone attack, when oil prices had spiked initially and stabilised as soon as it became clear that oil supplies to the world would not be disrupted.

Overblown expectations

There is knee-jerk reaction today, but the event may soon be put on the back-burner. This is mainly as nobody was echoing any chances of a fully blown-out conventional war as most countries in West Asia stand divided in their opinion against the US.

New York Times columnist Max Fisher is of the view that expectations of a full blown war are overblown. “All but forced to retaliate, Iran will likely aim for limited counter attacks that damage the United States, but don’t lead to all-out war,” Fisher wrote on January 3 in a column.

According to the columnist, Iran could call upon proxy militias in Lebanon, Yemen, Iraq and Syria. But no governments are eager to join it in an outright war. American allies in the region — Israel and Gulf States such as Saudi Arabia — would be unlikely to join, unless dragged in by Iranian attacks.

“While the possibility of an unintended slide to war is impossible to rule out, fears of World War Three — a phrase that trended overnight on social media — are overblown. Russia and China might strenuously object to American attacks, but they are no more likely to join the fight than they were when the United States invaded Iraq or helped to topple Libya’s government,” Fisher says.

Stephen Bryen, who writes for Asia Times , said in his column that Iran has no military hope against the US and Israel combine. “Iran has short, medium and some long-range rockets, and the ability to use terrorism to its advantage. Beyond that, Iran has little else. The Iranian Navy is worthless as a fighting force. Its Air Force is made up mostly of old planes that are hardly flight worthy. It does not have precision weapons. Iran does have drones and ageing Russian cruise missiles. It also has proxy forces that can cause trouble for Israel in the form of Hezbollah and, to a degree, Hamas. But not much more,” he wrote.

Bryen has served a senior staff director of the US Senate Foreign Relations Committee, as the Deputy Undersecretary of Defence for trade security policy, as the founder and first director of the Defence Technology Security Administration in the US.

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