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Investors worried about the US/China trade war have another geopolitical concern with tensions rising between President Trump and Iran.
It does seem President Trump and the US has a predilection for getting into conflicts or issues around the world.
Investors are right to worry about the situation in the Middle East. It could be a source of volatility in the short term at a time when global markets are already vulnerable. But ultimately, like the trade war, we believe that the US will seek to negotiate a solution.
Unwinding a deal
Back in 2015 various countries around the world signed a deal with Iran to limit Iran’s nuclear capabilities in return for Iran being able to export its oil. In other words, sanctions were removed from Iran.
That helped push oil prices down and petrol prices at the bowser in Australia down.
But last year, President Trump said America was going to leave the 2015 deal because he believes Iran is building a nuclear program. American sanctions kicked in against anyone who trades oil with Iran.
That of course has led to a sharp reduction in Iranian oil exports and some rise in world oil prices.
War fears
Of course, Iran isn’t very happy about this. That has created tension in the Middle East and prompted fears of a military confrontation. After initially approving a military strike after Iran downed a US drone, President Trump pulled back from launching the strike.
Trump has also announced more sanctions and in response Iran has closed diplomatic channels.
The tension obviously threatens the flow of oil through the Strait of Hormuz through which 20% of the world’s oil production flows daily.
Trump’s interests
This is a major flash point and major issue.
Ultimately, however, I do think it’s again in President Trump’s interest to resolve this issue through negotiation rather than military action.
Americans do support America being tough particularly when it comes to the Middle East. But when it gets bogged down and it results in much higher oil prices, as presidents found in the 1970s, it doesn’t go down so well with the American electorate.
Support from many traditional US allies like Europe is also weak because they didn’t support Trump’s decision to break off from the 2015 nuclear deal with Iran.
Source of volatility
So, we believe it is in Trump’s interests to resolve this issue in a negotiated fashion that avoids a sharp rise in oil prices.
But obviously the tension is a source of uncertainty, along with trade. And both of those issues – the trade war and Middle East tension – are potential sources of volatility for investment markets over the next few months.
Author: Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist, AMP Capital Sydney, Australia
Source: AMP Capital 11 July 2019
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