El-Erian: Rising oil price risks ‘classic stagflationary shock’
The jump in the oil price today, following Israel’s attack on Iran, is a “bad shock for the global economy at a bad time”.
That’s the warning from Mohamed El-Erian, President of Queens’ College, Cambridge, and advisor to insurance giant Allianz.
Speaking to Radio 4’s Today programme, El-Erian explains that a higher oil price can lead to a “classic stagflationary shock”, undermining economic growth and fuelling inflation.
El-Erian says:
For the average consumer, they will be looking at more income uncertainty. They will be looking at higher petrol prices, and in the UK, they’re probably looking now at higher risk of taxation in October.
[reminder: economists are already warning that Rachel Reeves may need to raise taxes in the autumn budget, to keep within her fiscal rules]
He also suggest that the probability of interest rate cuts has fallen, which will disappoint president Trump who has been demanding lower borrowing costs.
The fact the US says it was not involved in Israel’s attacks means they are “another shock to the stability of the US-led the global economic order”, which was already facing questions, El-Erian adds, saying:
So whatever way you look at it, it’s negative short term, it’s negative longer term.
Key events
Update: Oil up 9%
The oil price remains sharply higher today, as tensions in the Middle East alarm investors.
Brent crude is currently up 9% today at $75.55 per barrel, on track to close at its highest level since February. US crude is also up 9% at $74.32 per barrel.
Tamas Varga, analyst at oil broker PVM (which is part of interdealer broker TP ICAP), says it is impossible to predict how the Israel-Iran conflict will develop.
Only a list of possible events can be drawn up. Iran pledged to retaliate but is it capable of effectively doing so and if it is, will it also target US bases?
Will regional oil supply and transport routes, namely the Strait of Hormuz, which 20 million bbls of oil sails through a day, be affected? Will the US and Western powers intervene to de-escalate? Will regional Arab powers get involved?
There are many questions without satisfactory answers, therefore it would take a bold man to bet on the reversal of the overnight price jump ahead of the weekend.
Trump: Iran must make a deal
Donald Trump is urging Iran to “make a deal”, warning that further attacks “even more brutal” than last night’s move by Israel have already been planned.
Posting on his Truth Social social network, the US president warns Tehran it must act before it is too late, saying:
I gave Iran chance after chance to make a deal. I told them, in the strongest of words, to “just do it,” but no matter how hard they tried, no matter how close they got, they just couldn’t get it done. I told them it would be much worse than anything they know, anticipated, or were told, that the United States makes the best and most lethal military equipment anywhere in the World, BY FAR, and that Israel has a lot of it, with much more to come – And they know how to use it. Certain Iranian hardliner’s spoke bravely, but they didn’t know what was about to happen. They are all DEAD now, and it will only get worse! There has already been great death and destruction, but there is still time to make this slaughter, with the next already planned attacks being even more brutal, come to an end. Iran must make a deal, before there is nothing left, and save what was once known as the Iranian Empire. No more death, no more destruction, JUST DO IT, BEFORE IT IS TOO LATE. God Bless You All!
US dollar benefit from flight to safety
The rush for safe-haven assets today has pushed up the US dollar, lifting it from Thursday’s three-year low.
The dollar index has gained 0.4% today, as the US currency gained against a basket of currencies. The pound has dropped by over half a cent, to $1.355.
Lee Hardman, senior currency analyst at banking group MUFG, says the Swiss franc, the yen and US dollar have all benefitted from the flight to safety.
Hardman adds:
The developments could provide a timely test of the US dollar’s traditional safe haven appeal after it hit fresh year to date lows yesterday prior to Israel’s military strikes.
On the other hand the flare up in geopolitical tensions in the Middle East and heightened risk of an oil price shock has triggered a reversal lower for high yielding carry currencies such as the Hungarian forint, South African rand and Mexican peso which have benefitted recently from the reduction in financial market volatility.
The more growth sensitive commodity currencies of the Australian and New Zealand dollars have been hit the hardest amongst G10 currencies.
TS Lombard predict oil’s geopolitical risk premium will fade, if crisis is contained
Consultancy firm TS Lombard have predicted that the surge in the oil price will fade, unless the US is dragged into the Israel-Iran conflict.
They told clients this morning:
Although it is too soon to tell if Iran will go further from its drone retaliation, it is clear that the US will not involve itself at this time, unless US assets are targeted. This alienates any “boots on the ground” scenarios which likely makes this recent escalation a transient episode.
We expect the geopolitical risk premium added to Oil today to fade if escalation remains contained.
Marco Rubio, Trump’s secretary of state and national security adviser, has stressed that Israel’s strikes were unilateral, while saying the U.S. had known attacks would occur.
British gas producer Energean has temporarily suspended the production and activities of its power floating production storage and offloading (FPSO) located offshore Northern Israel, following the attack on Iran overnight.
Energean told the City of London this morning that it had received a notice from Israel’s Ministry of Energy and Infrastructure ordering the suspension, “following the recent geopolitical escalation in the region.”
It adds:
The safety of Energean’s staff is our top priority. All production activities have now been temporarily suspended and notices have been issued to Energean’s customers and other stakeholders.
Energean maintains a close dialogue with the Ministry of Energy and Infrastructure and other relevant stakeholders to facilitate the safe resumption of production as soon as possible.
Energean’s shares have dropped by over 6%, the top faller on the FTSE 250 index of medium-sized companies.
A conflict between Israel and Iran could dampen the outlook for the German economy if it leads to an increase in oil prices, the economic institute DIW Berlin has predicted.
DIW chief economist Geraldine Dany-Knedlik says:
“If a noticeable increase in oil prices were to result from this, they would be significant dampening factors that come at an unfavourable time.”
Dany-Knedlik points out that consumer sentiment would be hit by a surge in fuel costs:
“Private households are less influenced by the announcements of the European Central Bank and more by the gasoline and diesel prices they perceive daily.”
The US stock market is set to fall when when trading begins, in a little over five hour’s time.
The futures market indicates the Dow Jones industrial average, and the broader S&P 500 share index, could both drop by 1.2%.
Richard Hunter, head of markets at interactive investor, says:
“Global markets are being rattled by an escalation of Middle East tensions as Israel attacked Iran’s nuclear programme overnight.
The news came after the close on Wall Street on what was otherwise a positive day, but even at this early stage Dow Futures are heading south in response to the attack. There was an inevitable rush to haven assets such as gold following the assault, while the oil price itself gained by more than 7% overnight, all but wiping out its losses for the year.
Of particular concern is the likelihood of retaliatory measures which, if aimed at the Strait of Hormuz where around 20% of global flows are handled, would further potentially constrict supply.
Budget airline Wizz, whose shares are down almost 5% today, says it has suspended flights to Tel Aviv and re-routed flights affected by closed airspace in the region for the next 72 hours.
El-Erian: Rising oil price risks ‘classic stagflationary shock’
The jump in the oil price today, following Israel’s attack on Iran, is a “bad shock for the global economy at a bad time”.
That’s the warning from Mohamed El-Erian, President of Queens’ College, Cambridge, and advisor to insurance giant Allianz.
Speaking to Radio 4’s Today programme, El-Erian explains that a higher oil price can lead to a “classic stagflationary shock”, undermining economic growth and fuelling inflation.
El-Erian says:
For the average consumer, they will be looking at more income uncertainty. They will be looking at higher petrol prices, and in the UK, they’re probably looking now at higher risk of taxation in October.
[reminder: economists are already warning that Rachel Reeves may need to raise taxes in the autumn budget, to keep within her fiscal rules]
He also suggest that the probability of interest rate cuts has fallen, which will disappoint president Trump who has been demanding lower borrowing costs.
The fact the US says it was not involved in Israel’s attacks means they are “another shock to the stability of the US-led the global economic order”, which was already facing questions, El-Erian adds, saying:
So whatever way you look at it, it’s negative short term, it’s negative longer term.
European markets fall
European stock markets have joined the global selloff, as the overnight escalation in the Middle East has triggered a wave of risk-off sentiment.
Here’s now the main indices have fallen:
Jochen Stanzl, chief market analyst at CMC Markets, says the markets are dominated by a single issue: Israel’s attack on Iran.
This alarming escalation in the Middle East has likely caught many investors off guard. Those who have been looking for an opportunity to sell stocks and take profits are now becoming active. It seems the DAX has seen its yearly high from just over a week ago for the time being.
Oil prices are skyrocketing as fears grow not only regarding the disruption of Iran’s recent strengthened oil exports but also the potential targeting of other oil production facilities in the region, should this conflict escalate further. Additionally, the transportation of oil through the Strait of Hormuz is now at risk. While the oil price is not as critical for the German economy as it was one or two decades ago, a rapid surge in prices can still affect the recent strength of the euro, which can no longer compensate for lower import prices under such circumstances.
Investors are now grappling with the prospect of two wars and an ongoing trade conflict, prompting a reassessment of risks. Gold prices are heading towards record highs, equities are under pressure, and the dollar is rising once again. The events of the past few hours have sparked a broad risk-off movement among investors.
In recent weeks, the U.S. has repeatedly tried to deter Israel from such an attack, but as we learned today, those efforts have been unsuccessful. News regarding the enrichment of weapon-grade uranium marked a turning point. The situation now hinges on Iran’s response. No one wants a wider conflagration in the Middle East, but the risk has noticeably increased due to the recent developments.”
Shares in oil companies BP (+2%) and Shell (+2.1%) have jumped, following the surge in the oil price overnight.
But the top riser on London’s FTSE 100 is weapons producer BAE Systems (+2.8%), reflecting concerns that the Israel-Iran conflict could escalate.
FTSE 100 drops at the start of trading
Britain’s stock market has dropped at the start of tading, with most blue-chip shares in the red.
The FTSE 100 share index, which finished Thursday at a record closing high, has dipped by 48 points or 0.56%, to 8837 points.
Airline shares are falling sharply – British Airways parent company, IAG, has lost 5.6%, followed by easyJet which is down 4.6%.
There is a “strong risk-off move” in several asset classes today, with the focus now shifting to what form Iran’s retaliation might take, reports Jim Reid, market strategist at Deutsche Bank.
He says:
There’ve been huge developments in the Middle East overnight, as Israel has carried out air strikes against Iran’s nuclear and military facilities. We still await further details, but press reports have said that explosions were heard in Tehran and Natanz, which is where one of Iran’s nuclear plants is. Iranian state TV has reported that Hossein Salami, the head of the Revolutionary Guards, was killed, along with armed forces chief of staff Mohammad Bagheri. Israeli PM Netanyahu has said the operation “will continue for as many days as it takes to remove this threat”, although US Secretary of State Marco Rubio has said the US weren’t involved in the strikes.
The news has led to significant fears about an escalation and a wider regional conflict. For instance, Iran’s armed forces spokesperson said that Israel and the US will receive a “harsh blow” in response, and Iran’s Supreme Leader said Israel “should expect a severe punishment”. In turn, oil prices have surged on the news.
Gold is heading towards a record high, as investors seek out safe-haven assets.
The spot price of gold has jumped 1% to $3,418 per ounce, towards the all-time peak of $3,500/oz set in April.
Derren Nathan, head of equity research at Hargreaves Lansdown, says:
Safe haven assets are back in demand with gold prices at seven-week highs at over $3,400 per ounce. Diminishing risk appetite, as well as the potential for lower interest rates on cash paint, a positive picture for investors in the yellow metal.
European shares are set to open sharply lower in under 30 minutes time.
Reuters has the details:
Euro STOXX 50 futures, which track blue-chip euro zone stocks, dropped 1.4%, with contracts on the German and French benchmarks each down over 1%.
Futures on Britain’s oil- heavy FTSE fell 0.4%.
Shares across Asia-Pacific stock markets fell sharply after Israel launched its military operation at Iran’s nuclear facilities.
Japan’s Nikkei dropped 1%, South Korea’s KOSPI has lost 0.85% and China’s CSI300 is down 0.66%.
Introduction: Oil surges after Israel’s attack on Iran
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Stock markets are sliding, and the oil price has surged, after Israel launched an attack on Iran overnight, targeting nuclear facilities, military commanders and Iranian scientists.
The attacks, a major escalation of tensions in the Middle East, have sent investors dashing into safe-haven assets, fearing it could spiral into a wider conflict.
Brent crude oil surged by over 10% when news of the attacks broke, reaching its highest level since January. It’s now up 8% at $73.52 per barrel, which would be the biggest daily rise since 2022.
Oil was driven higher by worries that supplies from the region could be disrupted, if the conflict escalates. Ipek Ozkardeskaya, senior analyst at Swissquote Bank, suggests that oil could push higher, perhaps to $90–$100 per barrel, in that scenario, saying:
Oil jumped as much as 13% after Israel launched a major and unprecedented attack on Iran, targeting nuclear and military facilities.
While the news isn’t entirely surprising—there had been reports of Israel preparing action and the U.S. ordered Americans to leave the region earlier this week—the Israeli strikes could mark the beginning of wider regional tensions. If Israel continues operations beyond its borders, the Middle East could heat up fast.
Latest: Israel says Iran’s nuclear programme poses an existential threat and vows that its operation will continue for as long as necessary. Iran has already launched hundreds of drones in retaliation and could go further. But how much further?
Benjamin Netanyahu has indicated that the Israeli operation will take “many days”, and warned that “Israeli citizens may have to remain in sheltered areas for lengthy periods of time.”
