Investors may be overestimating the long-term damage from the Middle East crisis. S-Pankki expects the conflict between the United States, Israel, and Iran to ease within weeks, with only limited economic fallout if energy supply stabilizes quickly.
As the bank put it in its news release today: “We see a short duration conflict as more likely for several reasons, so our estimate for key economic indicators is that they will soften only moderately.”
That relatively calm baseline stands in contrast to the sharp market reaction in March. Oil prices surged, equities fell, and rate expectations shifted upward. Yet the underlying assumption from S-Pankki is that these moves may prove temporary, provided that geopolitical tensions do not escalate further.
The central variable is energy. A normalization of supply, particularly through the Strait of Hormuz, would ease inflation pressures and allow growth expectations to recover. From an investor perspective, “it is essential that energy supply normalizes within a relatively short period of time. If this happens, the effects on the economy are likely to remain moderate.”
There is, however, a more persistent layer of impact beneath the surface. Even if the macroeconomic effects fade, capital flows may not fully revert. European investors, in particular, are beginning to question their heavy exposure to US assets after a decade of strong returns.
The Finnish lender cautions that markets may be pricing in too much pessimism, especially if the conflict de-escalates as expected. As S-Pankki concludes, “we believe the situation will calm down slowly and cautiously, and that will be enough to serve as a positive signal for markets.”
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5 min read
Investors may be overestimating the long-term damage from the Middle East crisis. S-Pankki expects the conflict between the United States, Israel, and Iran to ease within weeks, with only limited economic fallout if energy supply stabilizes quickly.
As the bank put it in its news release today: “We see a short duration conflict as more likely for several reasons, so our estimate for key economic indicators is that they will soften only moderately.”
That relatively calm baseline stands in contrast to the sharp market reaction in March. Oil prices surged, equities fell, and rate expectations shifted upward. Yet the underlying assumption from S-Pankki is that these moves may prove temporary, provided that geopolitical tensions do not escalate further.
The central variable is energy. A normalization of supply, particularly through the Strait of Hormuz, would ease inflation pressures and allow growth expectations to recover. From an investor perspective, “it is essential that energy supply normalizes within a relatively short period of time. If this happens, the effects on the economy are likely to remain moderate.”
There is, however, a more persistent layer of impact beneath the surface. Even if the macroeconomic effects fade, capital flows may not fully revert. European investors, in particular, are beginning to question their heavy exposure to US assets after a decade of strong returns.
The Finnish lender cautions that markets may be pricing in too much pessimism, especially if the conflict de-escalates as expected. As S-Pankki concludes, “we believe the situation will calm down slowly and cautiously, and that will be enough to serve as a positive signal for markets.”
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