Nothing is achieved in war and finance except by precise calculation. The aphorism-attributed in many quarters to Napoleon and adapted by modern philosophers-fits the current geopolitical and macroeconomic environment with difficulty. As the forecasts of analysts and observers multiply, it is becoming increasingly evident that with the current volatility of markets and the speed with which frictions and tensions follow one another, the key word in the stock market as well as in portfolios is: prudence.
Indeed, it is not yet clear whether events in the Middle East will have an impact on monetary policy in Europe and the United States. And this is just one of the unknowns on the horizon. Generally, uncertainty tends to lead to the purchase of safe haven assets, which under certain scenarios could see a reversal in the recent rise in government bond yields.
Corrado Cominotto, head of active asset management, Banca Generali asset management area, explains the concept this way, "The conflict we are witnessing in recent days in Palestine certainly represents an additional source of volatility in a macroeconomic context characterized by the already present uncertainty stemming from the next moves of central banks aimed at containing inflation."
It should be remembered that the current situation looks different from that which had characterized the conflict between Israel and a coalition of Arab nations, mainly Egypt and Syria, which broke out on Oct. 6, 1973, during Yom Kippur, the holiest day in Judaism.
"Then Egypt and Syria had the support of many Arab countries, and the Organization of Petroleum Exporting Countries (OPEC) decided to use oil as a political weapon. OPEC declared an oil embargo against the United States and other countries seen as supporters of Israel resulting in an increase in the price of oil from $3 to $12 per barrel with consequent negative effects on the global economy," recalls Cominotto.
What history teaches us
Looking at what happened during the 1970s, what attracted investors most were safe haven assets such as gold (from about 100 in 1973 it rose to a high of about 850 in 1980) and silver. The case for government bonds is different: for example, the U.S. Treasury, during the period in question, suffered from the sharp rises in market rates due to the inflationary flare-up triggered in all developed countries by the soaring price of oil.
"Currently such an embargo is highly unlikely. If Iran were to be involved, however, there could be a sudden rise in oil prices above $120 a barrel causing the specter of a reflationary phenomenon to return to investors that could lead central bankers to remain more 'hawkish' than expected effectively causing a recession."
More generally if one looks at what has happened historically in similar cases to attract investors the most have been safe haven assets such as government bonds, particularly Treasuries that also provide currency diversification derived from the U.S. dollar.
"So far chasing the attack last Saturday, Oct. 7, we are witnessing a rise in both oil and gold that is all but contained. In fact, both asset classes still remain within levels already traded in recent weeks. The bond and equity markets as a whole have also not changed significantly," Cominotto concludes.
Corrado Cominotto, head of active asset management at Banca Generali
The conflict we are witnessing in recent days in Palestine certainly represents an additional source of volatility in a macroeconomic context characterized by the already present uncertainty stemming from the next moves of central banks aimed at containing inflation
