Lessons from 50 years of oil shocks… “Recession risk if the Fed tightens”

“Geopolitical shocks tend to be short-lived in financial markets”

“Rate hikes by the Fed cannot be ruled out”

If rates rise as in the 1970s

it could lead to a recession

As international oil prices surged on U.S. and Israeli strikes against Iran—shaking global financial markets—an analysis says the key variables that will determine market direction are how long the oil-price shock lasts and how the U.S. central bank (the Fed) responds.

According to MarketWatch on the 9th, international crude prices rose at a record pace following the U.S. and Israel’s military operations. In the fallout, volatility expanded across nearly all major global asset classes over the past week.

On Wall Street, attention is focused on the historical tendency for geopolitical shocks to have relatively short-lived effects on financial markets. Manish Kabra, head of U.S. equity strategy at Société Générale, analyzed cases of sharp oil-price spikes over the past 50 years, including Russia’s invasion of Ukraine in 2022, the Iraq war in 2003, the Gulf War in 1990, the Iranian Revolution in 1979, and OPEC’s oil embargo after the 1973 Yom Kippur War.

He said the most important variables for markets right now are the duration of the oil shock and central-bank reactions.

Kabra said, “The key variables for global markets can be summed up in two: first, how long the oil shock lasts; second, how central banks, including the Fed, respond.” He added that the reason the 1970s oil shocks fed into recessions was that the Fed’s tightening amplified the shock.

Recently, in the rates-futures market, expectations have spread that higher oil prices will reduce the likelihood of additional Fed rate cuts. Some investors also believe that if elevated oil prices stoke inflation, the possibility of the Fed moving to raise rates cannot be excluded.

However, market-based long-term inflation expectations have yet to show major change. This suggests investors judge the current oil-price rise is more likely to remain a temporary shock than translate into sustained inflationary pressure.

A representative long-term inflation-expectations gauge, the “5-year, 5-year forward inflation expectation rate,” is a metric derived from the U.S. Treasury market and reflects average expected inflation over the five-year period beginning five years from now. The gauge has been trending lower since last summer.

Kabra said, “Ultimately, whether central banks view this oil spike as a temporary price increase and look through it will determine market direction.”

An additional variable being discussed is when President Donald Trump will scale back military involvement. President Trump is scheduled to hold a press conference in Doral, Florida, and was reported to have said in a CBS News interview that this war “seems almost over.” But BCA Research said that because this conflict involves direct participation by Israel and Iran, it may not be easy for President Trump to unilaterally reverse the military strategy.

As for equities, during periods of sharp oil-price increases, U.S. stocks have tended to perform relatively better than stocks in other regions. At the same time, the dollar and gold prices have often risen.

In past episodes, oil prices rose an average of 9.9% one week after the shock, 33.2% after three months, and 30.9% after six months. Gold prices also tended to rise an average of 2% after one week, 5.2% after three months, and 22.6% after six months.

By contrast, global equities were weak in the short term. A global equity index posted average returns of –0.9% after one week, –2.7% after three months, and –1.6% after six months. The S&P 500 Index, however, was relatively resilient, rising an average of 0.3% after one week and also 0.3% after six months.

New York=Correspondent Park Shin-young nyusos@hankyung.com