Israel faced a missile attack from Iran on Tuesday, causing US stock markets (^DJI, ^IXIC, ^GSPC) to dip into the red. Raymond James Washington policy analyst and managing director Ed Mills joins Morning Brief to discuss this development and its implications.
Mills observes that markets have been "shockingly resilient" despite global unrest. Notably, oil prices (CL=F ,BZ=F), which would typically be most directly impacted by such events, have shown minimal reaction.
"There are a lot of unknowns ahead and Israel will absolutely respond. They cannot let hundreds of missiles going towards their country be met without a response," Mills states. However, he notes that the nature of Israel's response remains "uncertain."
While the next steps in this Middle Eastern conflict depend on various players, Mills foresees Israel conducting a direct strike on Iran. He suggests that this escalation might paradoxically lead to deescalation, which could be very positive for markets — though US involvement remains "a wildcard."
Alright. Well, traders are bracing for further disruption in the Middle East as Israel vows to retaliate against Iran's Tuesday's missile attack. Oil prices surging for a second day on supply concerns while the S&P futures slide for a second day. Joining us now, we want to bring in Ed Mills. He's Raymond James Washington Policy Analyst and Managing Director. Ed, it's great to have you. So, I'm curious, as we just take a step back and try to figure out what exactly this means on a global scale for the economy. What is your initial read just on these heightened tensions that we're seeing play out in the Middle East?
Yeah, Seana. I think the initial read is that we need more information. Um, what we have seen is over the last couple of years, a market, um, in a global economy, in a US economy that have been shockingly resilient despite global tensions rising. Um, when I talked to our energy team here at Raymond James, um, they have highlighted record US energy production as one of the ways in which it's insulated. Uh, the abilities for other producers such as Saudi Arabia to come online, uh, if necessary, and the fact that despite a lot of geopolitical risk, the physical supply of oil globally really hasn't been impacted. Um, there are a lot of unknowns ahead and Israel will absolutely respond. They cannot let, um, hundreds of missiles going towards their, uh, country be met without a response. But the history of the last couple of years is that we have short-term spikes and longer term things settle down.
What's, do you calculate that response from Israel may look like, Ed?
It's uncertain just yet, Brad, but when I looked at the, uh, statements of, uh, uh, Prime Minister Netanyahu, uh, it seems very clear that Israel feels as if a strike against the nuclear capabilities of Iran and their nuclear program is absolutely, um, at the top of their list. They've talked about targeting, uh, key officials, uh, potentially within Iran. You have Israel who has been, um, systematically over the last year since the terrorist attacks of October 7th, uh, looking to go after proxies. You've seen that with Hamas, Hezbollah, uh, now more directly, uh, towards Iran. Um, so more direct strikes inside Iran, I think, would be the next step, especially since you had, uh, direct missiles coming from Iran yesterday over to Israel.
Well, then naturally the next question becomes and, and as is always the case with geopolitical tensions, is, is there spillover, or is there containment from your assessment thus far?
Yeah. Um, I think it is still too early to tell. Um, what you look at, um, and I think a big wild card here is what is the US response? What is US involvement? Uh, there are personnel in the area, there are submarines in the area that have been announced. Um, so the spillover effect kind of will depend a little bit on the US response as well as other actors and others countries within the region. Um, you have a number of, uh, countries who would like to de-escalate. Um, there is a lot of pressure on Saudi Arabia to become involved here, uh, potentially be an off-ramp. And I do think that what we've seen over the last year is getting close but not crossing the line over ceasefires. And there's been an expectation recently. You probably need to see an escalation before you can de-escalate. So if there is any silver lining people are looking for, is this escalation that potential start of an off-ramp to de-escalation? I think it's a little bit too early to call that just yet, but that's, I think, what the market will be looking for. Uh, because if the market sends any de-escalation, any ceasefire, uh, that will be received very positively.
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This post was written by Angel Smith