Rising oil is still the big market risk despite today's pullback, analysts say
Markets kept their cool on Monday amid a fast-moving and volatile geopolitical landscape in the Middle East — but the longer-term risk premium has likely risen, while oil prices remain on edge, analysts said.
Iran launched more than 300 drones and missiles against military targets in Israel on Saturday, marking the first direct attack on the Jewish state from Iranian territory. The offensive caused limited damage and no fatalities.
Iran said it was acting in self-defense in response to a strike on its diplomatic compound in Damascus, Syria, earlier this month. Israel has declined to comment on its involvement.
Also on Saturday, ahead of the strike, Iran seized a container ship in the Strait of Hormuz that Tehran said was linked to Israel. The sea passage is described as the "world's most important oil chokepoint," with flows totaling around 21% of global petroleum liquids consumption in 2022, according to the U.S. Energy Information Administration.
By Monday, global players including the U.S. and European leaders were seeking to cool tensions, urging Israel to show restraint in its response.
Foreign exchange markets are pricing in "near term de-escalation" in the wake of the weekend events, Adarsh Sinha, co-head of Asia FX and rates strategy at Bank of America, told CNBC's "Squawk Box Europe" on Monday. The 'safe haven' U.S. dollar was 0.15% lower against a basket of major currencies early Monday, also weakening against the Iranian rial and the Israeli shekel.
Sinha nevertheless added that "the fact that we moved from a proxy confrontation to a direct confrontation, even though that de-escalates in the near term, the longer term risk premium probably goes up."
"I think the FX market ultimately will take its cue from oil prices