The Middle East under renewed tension

Rarely has the geopolitical scene been so disrupted as in recent years. After Ukraine's invasion of Russia and Donald Trump's trade war, the conflict in the Middle East has taken on a new dimension with Israel's surprise attack on Iran's nuclear installations and certain military sites.

The two countries have already engaged in several passes of arms in recent months, but this time Israel has gone one step further. Its aim is now to prevent Iran from acquiring nuclear weapons.

At this stage, it is difficult to know whether Israel will succeed in convincing Iran to halt its nuclear enrichment programme for military purposes by using force. As it is difficult to see a rapid resolution to the conflict, the financial markets are seeing a further increase in geopolitical uncertainty. Logically, this uncertainty is concentrated mainly on the oil market.

Fears that the conflict could spread to a region where a third of oil production is concentrated led to a sharp rise in crude oil prices. Brent rebounded sharply from USD 69 to over USD 78 a barrel, before returning to the USD 75 mark. It should be pointed out that until now oil prices had been on a downward trend, with the market very well, if not too well, supplied. It should be remembered that the Organisation of the Petroleum Exporting Countries and its allies (‘OPEC+’) have been increasing their oil production for several months. What's more, OPEC has significant excess capacity (around 5 million barrels a day), which should be able to compensate for the possible disappearance of Iranian oil -- Iran exports around 1.7 million barrels a day. This can therefore be seen as a potential stabilising factor for crude oil prices, provided of course that the conflict does not escalate and that there is no closure of the Strait of Hormuz, through which nearly 14 million barrels a day pass.

As the rise in oil prices is likely to rekindle inflationary pressures, as is the increase in tariffs sought by Donald Trump, this is likely to complicate the task of central banks, which are currently engaged in a cycle of rate cuts. However, this prospect only slightly increases risk aversion, as equities are holding up rather well: the S&P 500 and Euro Stoxx 50 indices have given up less than 2% since the start of hostilities. On the other hand, investors are increasingly looking for safe havens, such as gold and the safest bonds.

In this context, the risk of escalation in the conflict between Israel and Iran should not be played down, but neither should the opposite. At this stage, the risk of a supply disruption on the oil market is not the most likely scenario. But it is certain that oil prices will face a new period of volatility. Investors can protect themselves against this volatility by favouring gold and investment-grade bonds, which continue to be the focus of ING's investment strategy.

As for equities, which have rebounded spectacularly since their low point on 8 April (+14%, in euros, for the MSCI index of leading global equities), it is best to focus on sectors with good earnings prospects, such as technology and finance.