At the outset of any escalation in geopolitical conflict, the humanitarian cost of military action will be the first question for many. When tensions between the U.S. and Iran erupted into war this weekend, economists were mindful of the potential loss of life and livelihoods. Still, they observed that the reaction in financial markets was rational.
As traders return to their desks today, it will be those on energy and oil teams who will have the most complex in-trays to unpick, with supply-chain disruption widely expected (and in some cases, risks already priced in) as a result of the chaos that unfurled in the Middle East over the weekend.
From a macroeconomic lens, UBS global chief economist Paul Donovan told clients this morning, there are four considerations. Most obviously is the consequence of higher oil prices and how that trickles through to the inflation number—a particular concern for U.S. economists whose ears are pricked for any further threats to affordability.
The second is whether global trading routes will be disrupted and slowed, with the Yemen-based Houthi military potentially launching attacks on ships passing through the Red Sea. The Red Sea is a vital trading route between the East and West, sitting between the continents of Africa and Asia. It funnels into the Suez Canal, which leads to the Mediterranean Sea, meaning if ships cannot pass through the Red Sea in the south, where it borders Yemen, boats would instead have to divert around the African continent.
