What next for markets if Iran attacks Israel?

Markets are currently in a big of a flight to safety on fears that Iran could be preparing retaliation for the embassy bombing in Syria three days ago.

Iran Supreme Leader Ayatollah Ali Khamenei said Israel would be punished
for the attack, while President Ebrahim Raisi said it will “not go
unanswered” after the attacks but those kinds of comments aren’t unusual.

Israel has said it wasn’t an embassy but a military building of Quds forces.

In any case, there are some vague poorly sourced reports talking about a response from Iran in the next 48 hours, including massive drone strikes within Israel. Obviously, that would be an overt act of war.

Oil prices have spike in response with brent above $90 and that would be perhaps the most-direct consequence of a war as Iran’s oil production and exports could be easily destroyed by Israel and would be a likely target.

For the rest of the market, it’s a classic case of risk aversion. US equities have reversed in a hurry.

Bonds are also bid but not strongly with 10-year yields down to 4.33% from 4.35%. The dollar is picking up as well but the moves have been less than 20 pips.

My rule of thumb is to always fade fear, particularly war fears. In this case, that would mean fading oil but it’s a bull market in crude right now so that’s tough. I may be more inclined to buy the dip in stocks, especially the Nasdaq. No war in the Middle East is going to dampen demand for tech stocks, though a super-spike in oil would certainly complicate the Fed’s job.

This article was written by Adam Button at www.forexlive.com.