Sticky forecasts?
One theme from the early days of this conflict in the Middle East was complacent pricing. Markets still saw the knee-jerk reaction of a flight to safety and a rotation away from risk, but it was on a small scale. Markets didn’t crash per se, they slumped. Even energy markets, which have arguably most obviously tracked the evolving state of the conflict, were complacent. Sure, front-month contracts rose but the rest of the curve was very sticky effectively thereby implying a very short conflict indeed. Looking at the price of those front month contracts with the beauty of hindsight: markets at first were pricing a war with limited economic disruption also.
As the conflict has dragged on and appears to continue to do so at least for now, some of that complacent pricing has been corrected. Equities still seem incredibly content with the risk despite the threat to global growth via the mechanism of constrained consumer demand. However, oil is now seemingly well anchored above $100pbl with the rest of the curve falling closer behind. The Dollar retains its bid with emerging market currencies, at least those with significant energy import dependencies, having now corrected slightly lower. So, that’s short-term pricing moving in a more sensible direction, but what about the forecasts?
Forecasts will always move slower than market pricing. Price discovery will occur from shifting supply and demand for an asset from speculative and real flows. Forecasts take time and due process to publish, so there’s an obvious lag but here’s the catch: those forecasts being published after the recent spike in geopolitical risk continue to bear great resemblance to market pricing pre-US/Israeli military intervention in Iran. That’s not necessarily a problem but it does suggest analysts see this conflict giving way to fundamental price trends present from before this conflict.
Discussion and Analysis by Charles Porter
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