For all the analysis of the US ‘fiscal cliff’, eurozone sovereign debt crisis, Japan’s lost decades and China’s stalling economy, the biggest threat to global financial markets this autumn is the danger of a sudden strike on Iranian nuclear installations by Israel, most probably before the US presidential election.
The fear then is that Iran would attempt to close the Strait of Hormuz, the vital oil artery of the global economy with 18 million barrels of oil passing through this 34-kilometre wide stretch of sea.
At present there is an armada of ships from 25 nations conducting a mine sweeping exercise in the Straits, including three of the most powerful US aircraft carriers, each with more planes than the entire Iranian airforce.
Unpredictable consequences
Military experts are in no doubt who would win but wars are very unpredictable. The US over-ran Iraq in three weeks in 2003 but failed to adequately plan the occupation leaving the country highly unstable and in a virtual state of civil war.
Stock markets hit rock bottom in the spring of 2003 just before the invasion of Iraq and the Second Gulf War. That was the point of maximum uncertainty. Remember some then thought Saddam Hussein had weapons of mass destruction and nobody could be entirely sure.
This autumn many global stock markets have recovered to almost pre-global financial crisis levels, mostly without a full recovery in economic output. Arguably they are ripe for a fall.
As in 2003 the countdown to military action in the Gulf is just the sort of thing to put fear back into the markets. The most immediate impact is already being felt in the price of crude. Oil prices are at levels today that have tipped better global economies into recession.
Oil price impact
If Israel insists on making its attack on Iran then the price of crude will soar to levels beyond the peak of $147 a barrel in July 2008 that brought on the global financial crisis of that autumn after the failure of Lehman Brothers.
The stock market response will be to discount another major recession with very much lower share prices across the board. Hopefully whatever happens in this military action will not be anything like the worst case scenario and the bounce back for financial markets will be equally vigorous.
However, if you want to isolate the biggest threat to global financial markets this autumn it has to be an Israel-Iran conflict, something that the money printing of global central banks can do nothing to influence or contain.
