What Killing of Top Iranian General Means for Markets, Oil

(Image: Bloomberg)

The markets responded to news that the U.S. had killed Iran’s top military leader as expected on Friday. Stocks weakened, as oil prices and gold strengthened. 

“Global oil markets will be volatile for weeks to come. There’s a reason, finally, for caution in the stock market,” according to Greg Valliere, chief U.S. policy strategist at AGF Investments, who added in a note that a resolution of tensions with Iran is “a long, long way off.”

Commonwealth Financial Network Chief Investment Officer Brad McMillan and Raymond James’ energy analysts Pavel Molchanov and Ed Mills also have weighed in on the different risks — namely retaliation from Iran — and market scenarios that could result from the conflict.

How Bad Is Market Volatility?

“The heightened risk factors we must now consider include increased domestic political dysfunction, a rising risk of military action (either by us or against us in an already troubled area), and a probable disruption of the oil markets,” McMillan said in a note to advisors and investors.

“While some short-term volatility is almost certain, the actual effects, over time, will likely not be nearly as bad as might be feared … ,” he explained. “Based on what we know about the markets now, we’re just seeing normal volatility.”

Elsewhere, the reactions have been more severe, the Commonwealth chief investment officer says, but they were not extreme.

“Oil prices, for example, jumped a bit less than they did following the attack on the Saudi oil facilities in September … . [P]rices for [gold] are up by only about 1%. So, even the stronger market reactions are not indicating panic,” he said early Friday. (Gold was up 1.8% as of 4 p.m.)

Energy Independence

McMillan sees a couple of reasons for the lack of panic. 

“First, the major potential risk — to oil markets — is mitigated by the fact that the U.S. is now the largest producer of oil and essentially approaching energy independence,” he said, noting that U.S. oil supplies are less vulnerable today than they used to be. 

“Second, in general, a war sends stock markets into positive territory after the initial period of volatility,” McMillan said. His colleague Anu Gaggar examined this phenomena during the height of the North Korea confrontation a few years back.

Additional Risks 

Despite some of Gaggar’s analysis, there are several reasons why war could be more damaging this time around, McMillan says.

“The major factor, from a market perspective, is that most companies now have global supply chains, so a war anywhere could disrupt the business environment around the world,” he explained. 

Still, most companies — with the exception of large energy firms — do not source materials and other inputs extensively from this region, McMillan adds. 

“The headlines are scary — and deservedly so. This event could lead to a major escalation of the U.S.-Iran conflict, and it will likely result in military actions from both sides. Expect more headlines,” the CIO said. 

While he expects more market volatility, and for the prices of oil and gold to “certainly bounce around …, any damage to your investments is likely to be relatively small and short term,” McMillan noted.

“The effect might even end up being positive,” he explained. “As a citizen, I am paying attention and concerned. As an investor, not so much.”