In a stark demonstration of how geopolitical tensions can shape financial markets, Wall Street closed significantly lower following fresh United States (US) military strikes on Iranian targets near the crucial Strait of Hormuz.
The response was immediate and severe, as Federal Reserve Chair Kevin Warsh's hawkish comments lifted bond yields, leading to a sharp decline in technology stocks, with the NASDAQ enduring the most significant drop of 1.03%.
The S&P 500 and Dow Jones Industrial Average followed suit, shedding 0.71% and 0.79%, respectively.
Bianca Botes, Managing Director at Citadel Global said that this risk-off sentiment has spilled into Asian markets.
"The Korea Composite Stock Price Index (KOSPI) tumbled by 3.49%, while Japan's Nikkei index fell by 2.81%. The MSCI Asian Pacific Index, excluding Japan, is down approximately 1.5%, signalling a collective market reaction to both a bruised Wall Street and a sell-off in the bond markets," Botes said.
Oil prices and the rand
Brent crude experienced a notable rise, edging up to about $95.46 a barrel on Wednesday morning, marking a more than 4% increase as the confrontation between the US and Iran re-ignited inflation worries. By the afternoon on Wednesday, Brent crude prices declined slightly to $93.95 a barrel.
Meanwhile, gold prices traded around $4,298 an ounce, reflecting a slight softening throughout the day.
The South African rand held steady as it opened on Wednesday morning trading at R16.18 against the US dollar, R18.73 against the euro, and R21.84 against the British pound.
By the afternoon on Wednesday, however, it clawed back to trade at R16.04 against the US dollar, R18.59 against the euro and R21.65 against the British pound.
What investors are watching
Adriaan Pask, Chief Investment Officer at PSG Wealth, argued that investors should be paying closer attention to emerging markets.
"These markets are expected to drive nearly two-thirds of global economic growth over the next five years, a significant trend that should not be overlooked. China and India alone contribute to almost 44% of global growth, highlighting the vast potential of opportunities in these regions," Pask said.
While many investors associate emerging markets with political instability and economic uncertainty, Pask said that focusing on these negative aspects may blind investors to fundamental shifts occurring in these economies.
"Emerging markets are not only about GDP growth; they are propelled by long-term forces such as a youthful workforce, rapid urbanisation, increasing wealth, technological adoption, and necessary infrastructure investments," Pask said.
"Despite fiscal risks in emerging markets, the assumption that developed markets are inherently safer is increasingly being scrutinised. Many emerging markets have undergone rigorous reforms, improving fiscal discipline; in fact, they now carry less debt on average than those within the Organisation for Economic Co-operation and Development (OECD)," Pask added.
Pask said shifting focus to commodities, particularly oil and gold, there is an observed pattern of consistent fluctuations tied to market developments and geopolitical strife.
As highlighted by investment strategist Izak Odendaal of Old Mutual Wealth, the year has witnessed extraordinary technological advancements coinciding with volatility in oil and gold markets. With much of the world's low-cost oil reserves situated in the Middle East, escalating tensions particularly around the Strait of Hormuz pose significant economic challenges.
"As President Trump ignites tensions in the region once again, the oil price shot up towards $120 per barrel amid recent US attacks. Although the initial shock subsided, the persistent instability continues to affect prices, reflecting the underlying complexities of transport routes and refinery capacity constraints globally," Odendaal said.
"With crude oil prices elevated, the impact on refined product costs—namely petrol and diesel—remains a pressing issue. The extra cost of these products, historically referred to as the “crack spread,” has see-sawed, with current costs around $60 per barrel, illustrating a continued inflationary pressure that threatens to slow economic growth," Odendaal added.
ashley.lechman@nationalmg.co.za