OpinionIran in the World PressInvestors wary of risk ahead of Iran deadline

Investors wary of risk ahead of Iran deadline

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Reuters: Interest rates, a slowing economy and near-record oil prices remain the main focus for U.S. investors, but news of a foiled plot to bomb commercial airliners is keeping geopolitical risk firmly on their minds. By Nick Olivari

NEW YORK (Reuters) – Interest rates, a slowing economy and near-record oil prices remain the main focus for U.S. investors, but news of a foiled plot to bomb commercial airliners is keeping geopolitical risk firmly on their minds.

Ahead of the August 22 deadline by which Iran has said it will respond to Western demands to suspend its nuclear activities in exchange for incentives, news Britain had foiled a plot to blow up aircraft over the Atlantic was the latest reminder financial markets are driven by more than economics.

“Another significant geopolitical event hit the headlines today, and the impact on the financial markets is pronounced,” said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York. “Bonds, in particular U.S. Treasuries, currently have a better risk/reward trade-off relative to stocks.”

As the New York trading day advanced, safe-haven flows to Treasuries eased, and stock indexes <.DJI> recovered losses, but sterling remained lower against the dollar, and investors said Iran is a looming risk.

The U.N. Security Council last month demanded that the Islamic republic suspend its nuclear activities by August 31 or face the threat of sanctions, but Tehran denounced the move as illegal and vowed to press on.

That leaves investors assuming that despite Tehran’s commitment to respond to the incentives package by August 22, it is unlikely to do anything but reject the array of energy, technological and commercial inducements offered to suspend uranium enrichment.

“It is always possible for a knee-jerk reaction in currency markets if Iran’s response comes across as particularly belligerent,” said Sophia Drossos, G10 currency strategist at Morgan Stanley in New York.

Iranian threats to disrupt the world’s oil supply are the big fear.

“To the extent there is such a premium built into oil prices, the looming deadline in Iran, the world’s fourth-largest oil exporter, is perhaps the most crucial of today’s risks,” said Chip Hanlon, president of Delta Global Advisors Inc. in Huntington Beach, California.

Iran also sits in a dominant position on the Strait of Hormuz, a conduit for 40 percent of the world’s globally traded oil. Supreme Leader Ayatollah Ali Khamenei warned in June that oil exports in the Gulf region could be seriously endangered if Washington made a wrong move. The U.S. Navy has pledged to safeguard the free flow of oil and trade through the channel.

Any threat of widening military actions in an already unstable region will send oil prices soaring, analysts said. That may slow the global economy while simultaneously prompting central banks to raise interest rates if those price increases feed through to other goods and services.

“If the Iranians want to keep the U.S. at bay, they will keep the oil flowing,” said Barry Ritholtz, fund manager at Ritholtz Capital Partners in New York. “If they stop the oil, there is no reason for the U.S. not to drop bunker busters on their nuclear facilities.”

Stock markets, in particular, could take a hit if rising oil prices prompt a drop in consumer spending and lower corporate profits, said Solaris’s Ghriskey. He expects consumer staples, health care, telecommunications and utilities to outperform the broader market. Economically sensitive sectors, like consumer discretionary, industrials, technology and basic materials, are to be avoided, he said.

For now, fixed-income investors are taking events more in stride.

“A lot of asset managers are accustomed to dates and deadlines and geopolitical risk,” said Joseph DiCenso, a strategist at Lehman Brothers in New York. If the Iran deadline “materializes into risk, then we’ll evaluate what it means.”

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