By Nouriel Roubini
FINANCIAL MARKETS’ IRAN DELUSION
F ollowing the United States’ assassination of Iranian Quds Force Commander Qassem Soleimani and Iran’s initial retaliation against two Iraqi bases housing U.S. troops, financial markets moved into risk-off mode: Oil prices spiked by 10%, U.S. and global equities dropped by a few percentage points, and safe-haven bond yields fell. In short order, though, despite the continuing risks of a U.S.-Iran conflict and the implications that it would have for markets, the view that both sides would eschew further escalation calmed investors and reversed these price movements, with equities even approaching new highs.
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That turnabout reflects two assumptions. First, markets are banking on the fact that neither Iran nor the U.S. wants a full-scale war, which would threaten both the Iranian regime and U.S. President Donald Trump’s re-election prospects. Second, investors seem to believe that the economic impact of a conflict would be modest. After all, oil’s importance as an input in production and consumption has fallen sharply since past oil-shock episodes, such as the 1973 Yom Kippur War, Iran’s 1979 Islamic Revolution, and Iraq’s 1990 invasion of Kuwait. Moreover, the U.S. itself is now a major energy producer, inflation expectations are much lower than in past decades, and there
American Consequences
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