homemarket NewsEscalating tensions between Iran and US could trigger a recession this year, says Geoffrey Dennis
Escalating tensions between Iran and US could trigger a recession this year, says Geoffrey Dennis
In retaliation for the killing of one of its top army generals, Qassem Soleimani, by the United States, Iran on Wednesday launched missile strikes at two US bases in Iraq. Geoffrey Dennis, an independent emerging markets (EMs) commentator, gave his verdict on the impact of escalating tensions in the Middle East.
In retaliation for the killing of one of its top army generals, Qassem Soleimani, by the United States, Iran on Wednesday launched missile strikes at two US bases in Iraq. Geoffrey Dennis, an independent emerging markets (EMs) commentator, gave his verdict on the impact of escalating tensions in the Middle East.
“First of all we are getting the expected Iranian retaliation and what that is doing is giving us another round of the impact on markets that we had when initially the Iranian general was assassinated. So we are seeing obviously higher oil prices, higher gold prices, stronger US bonds as a clear safe haven and all of that translates into lower stock prices and indeed lower risk assets generally. So it is a classic risk-off type of response, no surprise here,” Dennis said.
He added: “The dramatic drop in the futures contracts for the US market for tomorrow is showing you that as well and I think the sell-off in equities generally is being exacerbated by the fact that the markets have had such a good run into the end of the year especially of course in the US. So we have lots of vulnerability here to bad news.
“We have a tit for tat process going on between the Iranians and the US which is highly dangerous. The markets are telling you that this therefore could go quite a bit further and in the limit what this actually means is you could get a big enough move in oil prices and to contribute to weaker global economy possibly a recession in 2020 and it is pushing up the price of gold and US bonds as well. This is a very difficult situation for investors and risk assets are going to remain under pressure until we see some signs that this thing is going to settle down.
“All of this is clearly bad for markets. A lot will actually will depend on what additional action the US takes, which I presume they will do. However, right now I think it is very dangerous for investors—it is wait and see and remain very defensive and just see how these events play out."
On Indian markets, he said: “If we manage to get out of this geopolitical mess that we are in now between the US and Iran and we get back to a sort of Goldilocks environment for markets in 2020 with the US soft but not too soft, Fed perhaps cutting rates a bit more or keeping rates low. India is an underperformer because there are other places that the investors may want to go to but on the other hand if we end up with a massive spike in the price of oil, India is going to struggle because of the dependence of Indian economy on imported oil.
“I worry very much that you are going to see this thing intensify between the US and Iran so the risk of higher oil prices from here is quite significant. Therefore, it could be very difficult for investors to get bullish about India in this environment, even though typically it is something of a safe haven, a defensive play in EM.”
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