It is generally agreed that this month has seen a significant escalation in long-standing Iran-Israel tensions. Both countries argue that their territory has been attacked in a manner that warrants and justifies direct retaliation. Both are threatening further escalation, notwithstanding other countries calling for calm.
Regardless of what happens next, many feel that a significant line has now been crossed in an unsettled part of the world that has experienced tremendous human tragedy, especially in the last six months. What some had deemed a relatively contained disequilibrium in the Middle East has now transitioned to a perilously unstable disequilibrium involving many parties.
As trading resumes Monday, traders and investors will react to higher geopolitical risks whose spillover can reach far and wide in asset markets. Beyond that, they must factor in the higher threat of stagflationary winds for the global economy at a time when risk-mitigating policy tools, such as fiscal and monetary measures, are already overly stretched, and inflation in the US is proving sticky.