Key Takeaways
- Global stocks dropped and oil prices surged after Israel launched airstrikes on Iran.
- Safe-haven assets rose while airline stocks fell amid rising fuel costs and flight disruptions.
- Defense stocks surged as investors reacted to heightened geopolitical tensions.
Global stocks fell on Friday and oil prices surged after Israel launched a series of airstrikes against Iran early Friday morning local time, targeting locations it said were related to Iran’s nuclear program.
Losses could be seen across the globe with the Morningstar US Market Index, Morningstar Japan Index and the Morningstar Eurozone Index all falling.
Israeli Prime Minister Benjamin Netanyahu said the country had launched Operation Rising Lion, a “targeted operation to roll back the Iranian threat to Israel’s very survival”.
According to Netanyahu, one target was the Natanz nuclear facility, where uranium is being enriched. Additionally, several scientists and military leaders, including the commander of the Iranian Revolutionary Guard, Hossein Salami, have been killed in Tehran and other parts of the country.
“The Israeli attacks on Iran pose a serious escalation of the conflict between the two countries but it is highly likely that Israel has not been able to destroy any Iranian nuclear facilities,” Panmure Liberum analysts Joachim Klement and Susana Cruz, said.
Since the US was not involved in the attacks, they do not expect Iran to retaliate against US sites in the Middle East, but are expecting repeated attacks and retaliations between Israel and Iran in the coming weeks.
“It is this Iranian reaction that can lead to an escalation of the conflict and drag the US into it, in which case, we would expect that global oil and gas supply will be disrupted for longer, creating another stagflationary impulse in Europe, the UK and the US, similar to what happened in 2022 after Russia invaded Ukraine,” the analysts added.
Oil Price, Oil Stocks Jump
Crude oil futures soared after the attack, with Brent crude rallying by 13% overnight before paring gains to around USD 73.17 per barrel, still up from the prior session’s USD 69.40 close.
“We expect, absent a wider war, today’s rise in prices will likely prove to be a sell-the-news event. Oil markets remain amply supplied with OPEC set on increasing production and demand soft. US production growth has been slowing, but could rebound in the face of sustained higher prices,” Morningstar research director Allen Good said.
“Meanwhile, a larger war is unlikely. The Trump administration has already stated it remains committed to talks with Iran. We expect a response from Iran, but it will likely be modest, like past retaliatory strikes, and not spark a wider war,” Good added.
European energy stocks led gains in the region, including Shell SHEL, Var Energi VAR, BP BP, TotalEnergies TTE, Repsol REP, Aker BP AKER and Equinor EQNR. According to Morningstar’s chief European markets strategist Michael Field, the preemptive strikes by Israel could disrupt oil supply in the region at a time when markets are in oversupply. He sees the risk of contagion in the region as low, with the market effectively dismissing the possibility of an all-out war in the Middle East.
“Despite the material move in the oil price today, the effect on the share prices of European oil stocks has been more muted. BP is up less than 3% this morning, and Shell up less than 2%. With sentiment negative toward the sector, energy is currently the cheapest sector in Europe. We see material upside for names like BP, ConocoPhillips COP and Exxon XOM,” Morningstar’s Field said.
Defense Stocks Edge Higher
Defense stocks were also found among winners, with stocks like Rheinmetall RHM, BAE Systems BA., Lockheed Martin LMT, Thales and Saab SAAB B trading higher.
Gold hit an almost two-month high on the news, although it pared some gains as the day progressed. The commodity was seen trading around USD 3,430 in the afternoon in Europe, after reaching as high as USD 3,443 during the night.
Other traditional safe havens like the Swiss franc, Japanese yen and US dollar all strengthened overnight.
Among the worst performing stocks, airline companies featured prominently, with easyJet EZJ, IAG IAG, Deutsche Lufthansa LHA, Ryanair RYA and Tui TUI all losing ground. The sector has been faced with weak airfare data in the United States, rising fuel costs and a deadly Air India plane crash in recent days. On top of this, Israel’s attacks on Iran have caused several airlines to change their routes to avoid flying over Israel, Iran, Iraq or Jordan’s airspace during the day.
Middle East Escalation Could Hit ESG Funds
According to Kenneth Lamont, principal of manager research at Morningstar, a serious military escalation in the Middle East could be another blow to ESG funds “which have already been battling against poor performance rising anti-ESG sentiment—particularly in the US.”
Traditional sectors often excluded from ESG portfolios, such as defense and fossil fuels, are likely to benefit, leading to a widening in the performance gap.
“The recent EMSA ESG naming guidelines, which emphasize climate objectives for sustainable funds and have further curtained fossil fuel exposure, further cementing this divide,” Lamont said.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
Correction: An early version of the article attributed two quotes to analysts at ING, but the comments were made by analysts at Panmure Liberum.
