Daleep Singh, Chief Global Economist and Head of Global Macroeconomic Research, PGIM Fixed Income shares his view on how the unfolding conflict in the Middle East may impact markets.
- Our instinct regarding the crisis in the Middle East is that just enough collective incentive exists to prevent an uncontrolled spiral of armed conflict.
- Our modal case (55%) that the conflict will be mostly limited to Gaza is based on three notable assumptions: the coming military operations stop short of a maximalist approach, Iran is restrained from expanding the conflict, and Russia assumes an “honest broker” role in order to extract leverage in Ukraine.
- Market reaction: temporary flight to quality; limited global impact.
- Our downside scenario follows closely (45%) in the event the conflict metastasizes into a regional war, and it is also based on significant assumptions: Israel launches a maximalist campaign that is perceived as overreach, war opens on additional fronts, and Israel and Iran trade strikes, engulfing other global powers.
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- The market reaction in the downside scenario may consist of a sustained surge (15-20%) in Brent crude oil prices and a potential steepening in developed market Treasury yield curves.
- However, the oil ramifications within this scenario also depend on whether Saudi Arabia is willing to offset any disruption to Iranian supply. Regardless of the outcome, the episode serves as another grim reminder of a central thesis that underpins our forecasting: we have returned to a global backdrop of intense geopolitical competition—the shocks will just keep coming.
- Market reaction: sustained spike in brent prices; steepening of fixed income curves due to uncertainty effects and energy spikes
