Iran’s Attack on Israel Heightens Geopolitical TensionsIran’sAttackonIsraelHeightensGeopoliticalTensions

Iran’s missile and drone attack on Israel drew renewed attention this week to an apparent rise in geopolitical risks. Wars in the Middle East and Ukraine have contributed to a broader sense of uncertainty over the global outlook, and an escalation in tensions would bring new implications for investors to consider. Just over the past week, market reaction to the strike by Iran, which was largely repelled by Israeli and allied air defenses, could be found in upward pressure on oil futures and the CBOE Volatility Index, or VIX.

The International Monetary Fund cautioned in a report on Tuesday that regional conflicts could raise downside risks if they escalate further, citing the wars in the Middle East and Ukraine as well as attacks on commercial ships in the Red Sea. These conflicts could lead to supply shocks in the food, energy and transportation sectors that would adversely impact global economic growth, the IMF said. Disruptions to oil production could restrict global supplies and create new price pressures, especially in Europe and Asia where energy imports are vital. This scenario could reverberate across central banks by pushing up inflation, potentially delaying rate cuts. A wider military conflict would also be challenging for emerging markets. EM assets tend to struggle when growing geopolitical risks drive investors to safe-haven assets like the US dollar, Treasuries and gold. PGIM Fixed Income’s Magdalena Polan, Head of Emerging Market Macroeconomic Research, and Mehill Marku, Lead Geopolitical Analyst, discuss more economic and investment implications in a new video.