Stock Market Reaction Amid Middle East Tensions

Energy and defense stocks surged while airlines faced declines as global markets opened the week cautiously following attacks on Iran by the US and Israel.

Investors are concerned about the potential for Middle East conflicts to disrupt energy supplies and fuel inflation. Oil, in particular, was hit hard, with Brent crude prices spiking by 13% before a slight pullback. A report indicated that Asian stock markets stabilized after Iran’s security chief called for a resumption of nuclear talks with the US.

In terms of sectors, energy companies gained as rising oil prices improved their profit forecasts. Meanwhile, defense firms saw increases amid expectations of more military spending. On the flip side, airlines faced pressure due to rising fuel costs and worries about disruptions in air travel.

“The stock market is likely to shift entirely towards oil prices as the key driver,” noted Michael Kantrowitz, chief investment strategist at Piper Sandler. “Stocks will feel the strain as long as oil prices continue to climb.”

Futures for US and European indexes dropped, with S&P 500 and Nasdaq 100 futures each down about 0.7% as of late morning in Hong Kong, though they had previously seen a decline over 1%. The MSCI AC Asia-Pacific Index fell by 1.6%, while Euro Stoxx50 futures were down 1.5%.

Citigroup recently upgraded UK equities from underweight to overweight, suggesting the market is heavily weighted toward commodities and defensive sectors, which could act as a good “geopolitical hedge.” Conversely, the bank downgraded Japan’s rating from overweight to underweight.

As the markets in Asia, Europe, and the US prepare to open, here are some areas to monitor:

• Energy: Major energy companies enjoyed notable gains across Asia, with Australia’s Woodside Energy Group and Hong Kong’s PetroChina jumping by 11% and 5.9%, respectively. Investors will likely watch global oil giants such as ExxonMobil and Chevron closely.

“The key question is how Iran’s response will influence global oil supplies, at least in the short term, and possibly longer,” remarked Rob Summell from Tortoise Capital. He speculated that price increases might be temporary unless significant supply disruptions occur. He also noted that a prolonged closure of the Strait of Hormuz might push prices above $100 a barrel, though he views this as unlikely.

• Defense: Defense stocks have risen over the past year due to growing global tensions, with recent Middle East incidents prompting renewed investment in the sector. For instance, Japan’s Hosoya Pyro Engineering saw its share price rise by as much as 20%, while Chinese firms such as Avic Shenyang broke double-digit increases.

Investors are likely to be paying attention to major US contractors like Lockheed Martin and Northrop Grumman, as well as European companies like Rheinmetall and BAE Systems. “This should be generally positive for European defense stocks,” commented analyst Jens-Peter Riek, although he cautioned that market movements would be more influenced by sentiment than actual earnings changes.

President Donald Trump has already called on allies in Europe and Asia to increase their defense spending, proposing a significant boost to US military budgets. Analysts suggest that increased military funding may extend to the Middle East, where US contractors already have a significant foothold in foreign military sales.

• Precious Metals: In times of geopolitical instability, safe-haven assets like gold and silver often see increased investment, driving up mining stock prices. Precious metal prices, especially for gold and silver, have already seen substantial rises in recent months, especially ahead of the Iran conflict.

Companies such as Australia’s Genesis Minerals and Hong Kong’s Chifeng Chilong Gold Mine marked significant gains. Notable stocks in terms of mining include Agnico Eagle Mines and Barrick Mining across North America, while Europe’s own Fresnillo and Hochschild Mining are also ones to watch. The Canadian stock benchmark, S&P/TSX Composite Index, is likely to perform well, given its strong ties to mining and energy sectors.

• Travel and Transportation: Higher oil prices could lead to increased fuel costs for airlines and subsequently squeeze profits. Rising tensions are also threatening global travel demand. U.S. airline stocks saw their largest drop since April due to expectations of conflict, while airlines in the Persian Gulf are extending groundings.

In Asia, companies like Australia’s Qantas and Japan Airlines faced significant drops in stock prices. Investors are turning their attention to U.S.-listed companies such as American Airlines and Delta.

“News of airspace closures over the Middle East and potential flight cancellations will immediately impact airline stocks,” said Francis Tan from CA Indosuez Wealth Asset Management.

Every 5% shift in Jefferies’ fuel price forecast may impact earnings per share by 5% to 10% for Delta Air Lines and United Airlines, while American Airlines could see a more dramatic 35% swing, according to analysts. Nevertheless, analysts believe North American airlines will not face a significant effect on Middle East travel overall.

Hotel operators could feel the pinch from travel disruptions, with InterContinental Hotels Group reporting a 3% decline in shares in London amid these uncertainties.

The impact of airspace restrictions in the Middle East might also hamper freight companies like FedEx and UPS, extending transit times and raising fuel expenses. However, logistical bottlenecks in the Red Sea and Suez Canal could result in higher service fees for container shipping companies.