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Please see today’s Daily Investment Bulletin from Brooks Macdonald, received this morning:

What has happened

Overnight, there are reports of explosions in the Iranian city of Isfahan, which is home to some significant centres of Iran’s nuclear program. According to The New York Times, two Israeli officials have said that Israel was behind the attack. The fear has been that the Middle East conflict might escalate further still, particularly since Iran had previously said they would respond to any attack. However, according to The Times this morning, Tehran has said that it does not plan an immediate military retaliation. As a result, while risk-aversion initially moved through markets in the wake of the news of the attack, some of these market moves have subsequently been pared back in the last few hours. As a case in point, the oil price initially surged to over US$90 per barrel before easing back a little, but it is still higher on the day currently.

Reaction to latest Middle East events

While details are still unfolding, it appears that the Israeli retaliation for Iran’s strike last weekend has so far been limited in its impact. The United Nations nuclear watchdog the International Atomic Energy Agency (IAEA) said in a post following the attack to confirm that there had been “no damage to Iran’s nuclear sites” but called for “extreme restraint” from both sides going forwards.

Fed speakers push-back on rate cut urgency

Before the latest Middle East escalation, markets on Thursday were focused on the latest US Federal Reserve (Fed) speakers to weigh in with their views as to the likely path for interest rates. Collectively, it appeared there was something of a push-back on the urgency to cut interest rates. New York Fed President Williams said, “I definitely don’t feel urgency to cut interest rates”, while Atlanta Fed President Bostic said, “I’m comfortable being patient”.

What does Brooks Macdonald think

The events overnight have put the geopolitical conflict ‘ball’ back in Iran’s court – what Iran chooses to do next will likely determine the broader regional and global impact – in particular, it will be key as to whether, if at all, Iran seeks to conduct another direct attack on Israel, or whether they revert to their previous playbook of using proxy forces instead. For markets, we appear to be entering a heightened phase of uncertainty and likely volatility, which is clearly not helpful. That said, the early assessment on the latest Middle East events overnight is that they appear to have been limited in scale, which explains why some of the risk-aversion market moves following the attack have seen some paring back at the time of writing.

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Andrew Lloyd DipPFS