Rising tensions in the Middle East have spooked investors By Reuters

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – Rising tensions in the Middle East have dented investor confidence and raised concerns about how riskier assets, including the highly valued U.S. stock market, might respond if the situation worsens.

Stocks fell on Tuesday as investors rushed to safe-haven assets such as Treasuries and the dollar after Iran fired a barrage of ballistic missiles at Israel. Iran said the attack was in retaliation for Israel’s campaign against Tehran’s Hezbollah allies in Lebanon. Israel said the attack was serious and would have consequences.

The index fell as much as 1.4% but later pared losses to close up 0.9%, while the index lost as much as 2.3% but recovered to end the day 1, 5% down. Buying was heavy in popular destinations for nervous investors such as gold, Treasuries and the dollar.

Past crises of heightened geopolitical tension, such as Russia’s invasion of Ukraine in 2022, have led to sudden but short-lived market moves, during which investors fled risky assets and flocked to safe havens, such as gold and the dollar.

This time, further market reaction could depend on Israel’s response and the escalation of the conflict between the two enemies, investors said.

“The market … is very sensitive to any worse-case scenario than this,” said Hasnain Malik, head of emerging and frontier equity strategy at Tellimer.

An earlier round of Iranian missiles fired at Israel in April – the first ever – was shot down with the help of the US military and other allies. Israel responded at the time with airstrikes in Iran, but a wider escalation was avoided.

Stocks and other risky assets sold off in April but recovered within days as fears of a wider conflict and economic disruption faded.

However, “if the war escalates, that’s obviously not good for the markets,” said Allan Small, senior investment adviser at Allan Small Financial Group with iA Private Wealth in Toronto.

A specific concern for investors is the price of oil, which rose on Tuesday. Investors fear that fears of supply disruptions in the Gulf region will send prices soaring, as has happened in previous periods of intense tension or conflict.

“As the conflict deepens, oil could indeed rise as the risk of a military response moving toward the oil-producing area around Iran increases,” said Quincy Krosby, chief global strategist for LPL Financial (NASDAQ :), in a note.

Beyond tensions in the Middle East, there are several potential market catalysts that could keep investors on their toes, including the upcoming U.S. election in November and a key jobs report this week that will help shape the Federal Reserve’s policy direction .

The Cboe Volatility Index, an options-based gauge of demand for protection against market swings, rose to a three-week high of 20.73 on Tuesday before paring gains to trade at 19.25.

“While it is rising, it remains below 20 enough to suggest that the markets — including the crude oil market — are not yet predicting an all-out military scenario,” Krosby said.

Meanwhile, options prices on the SPDR S&P 500 Trust ETF (SGX: ) expiring on Nov. 8, just three days after the US election, imply a nearly 2% move for the S&P 500 index-tracking ETF on expiration day, according to options. ORATS analysis service.

“This reflects traders’ expectations of significant market volatility around the election,” said ORATS founder Matt Amberson.

Nearer-term, traders remain focused on the September payrolls report due on Friday, with SPY options poised for a 1.1% swing on the day, signaling expectations for potential surprises in the unemployment data, Amberson said.

For now, market participants are left guessing whether the latest bout of fear will prove fleeting. “Markets are therefore likely to show incredibly high sensitivity to the flow of incoming geopolitical news over the next few hours,” said Michael Brown, senior research strategist at Pepperstone.