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In the shadow of geopolitical risks the economy

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Concern about a new “black swan” in the markets

Σκιγεωιτικ&iota ;νδνων ηοομiαIt clouds the landscape for markets and economies, following the latest geopolitical developments and legitimate concerns arising about the Middle East scene, with markets facing a potential new 'black swan'.</p>
<p> The big question is the timing, the extent and the type of any continuation of the Israel-Iran confrontation and more broadly in the Middle East.</p>
<p>A wider conflict between Israel and Iran will likely lead to higher energy prices, which in turn will prompt central banks to tighten monetary policy to control inflation, hurting growth.</p>
<p>Clouds landscape for the markets and economies, following the latest geopolitical developments and the legitimate concerns arising about the scene in the Middle East.</p>
<p>According to the IMF a 15% increase in global oil prices due to a possible wider conflict in the Middle East, along with higher transport costs to avoid attacks in the Red Sea, would likely increase global inflation by 0.7 percentage points. </p>
<p>A wider conflict in the Middle East could disrupt up to a third of global oil production and about 15% of natural gas production.</p>
<p>However, according to the rating agency Scope, a full-scale conflict in the Middle East is unlikely, but any further escalation of tensions would have significant negative consequences for commodity markets and inflation, confirming geopolitical developments as a key credit challenge, globally.</p >
<p>However, any further escalation of conflict within the region – even if it does not reach a full-scale regional war scenario – could have significant economic impacts beyond the Middle East through higher commodity prices, disruptions to shipping routes and risk in the financial markets.</p>
<p>However, markets have reacted relatively coolly so far, discounting the non-escalation of hostilities. The retreat of Oil and the small increase of the Dollar, show no real concern. Only Gold's rally near $2400 is strong, but it has started long before the event in Israel.</p>
<h3 class=The stock markets

The new crisis has found the stock markets close to their all-time highs and this increases concern and volatility for a deeper correction, as a result of the delay in reducing high interest rates, low expectations for growth, but also the fear created by the successive geopolitics crises.

The impending strike by Israel must be considered certain and the question lies only in the magnitude of the retribution.

Consequently volatility will continue in the stock markets.

< p>There was also high volatility in the Athens Stock Exchange, which, on Tuesday, fell to a 2.5 month low, only to recover in the following sessions.

However, as Beta Sec points out, it has been proven that in the vast majority of cases where markets have come under pressure from geopolitical tensions, the long-term performance of stocks has not been affected. In fact the events 'faded out' within a month or two and markets returned to pre-surge levels.

Oil

After the episode between Iran and Israel, analysts “saw” a move towards $100, while shortly before the new war scenario, Brent rallied above $92 a barrel. Oil prices have subsequently been bearish as oil markets have priced in prolonged tension and heightened geopolitical risk. Goldman Sachs points out that the current level of Brent already incorporates a geopolitical risk premium of $5-10.

However, at the beginning of the week, there were scare estimates on the market for the course of the “black gold”. Societe Generale's analysts note the risk of it exceeding 140 dollars a barrel. Citigroup sees a price above $100 a barrel as possible.

One reason for calm in the oil market is the tendency of some OPEC+ members to increase production quotas.

However, a wider conflict in the Middle East could disrupt up to a third of global oil production and about 15% of natural gas production.

Gold

Geopolitical tensions helped gold prices to hold near the record highs they hit last week, as gold is always seen as a safe haven for investors during times of tension. Geopolitical uncertainty continues to provide support for gold if there is any escalation.

JP Morgan analysts “see” the price of gold at $2,500 an ounce, while Citi analysts appear more optimistic and place the price of gold at $3,000 an ounce in the next 12 to 18 months. It is noted that the price of gold “touched” a record at 2,431.29 dollars on Friday.

Interest rates

The new global scenario that is taking shape is likely to brake the rate cut.

Central Banks, recognizing geopolitical crises and the difficulty of taming inflation, are revising their optimistic forecasts for multiple rate cuts.

According to Capital Economics, interest rate cuts are removed if the tension in the Middle East escalates. A rise in the price of oil would complicate efforts to bring inflation back to target in advanced economies, but would have a meaningful impact on central bank decisions only if higher energy prices penetrate core inflation..

Deutsche Bank and Morgan Stanley cut their forecasts for ECB rate cuts, now predicting just three moves this year.

On the other hand, the combination of high growth and persistent inflation raises the possibility that the Fed will raise, rather than cut, interest rates, driving borrowing costs up to 6.5%. Such a development would trigger a “sell-off” in bonds and shares, according to UBS.

However, according to Christine Lagarde's statements, the ECB remains on track to cut interest rates in the short term, as long as there is no major shock.

Source: www.kathimerini.com.cy

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