Another Update from the Flightdeck

We are now in the second week of the war in Iran. Financial markets initially absorbed the bad news with surprising resilience, but sentiment has deteriorated quickly. Oil trading above $115 per barrel early this morning is wreaking havoc with inflation forecasts, pushing bond yields sharply higher and even reviving talk of rate hikes in the UK and the Eurozone.

Global equities have finally got the memo and have sold off hard in the last few trading sessions. The Nasdaq is off 8% from its previous high, Germany is down 11%, the Nikkei has fallen 15%, and the Kospi briefly dropped as much as 20%. The CNN Fear & Greed Index now signals extreme fear. Even gold has struggled and silver remains more than 25% below its peak earlier this year.

The US dollar is one of the few winners. Strangely, so are Microsoft, Bitcoin and Palantir, but that is a different discussion. The point is that markets are still functioning. Not everything is being sold off. There is rotation, liquidity remains intact, and in time these bouts of volatility may well be remembered as attractive entry points.

In the meantime, the oil price will determine the direction of travel and investors best prepare for more volatility, as things are likely to get worse before they get better. The saving grace may be political reality. The wars in Iraq and Afghanistan ultimately cost the US economy an estimated $8 trillion. With midterms looming, Washington can hardly afford a conflict of similar scale.