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The Mideast shock: Calm for now, but the worry lingers on

There is speculation that Iran may engage in some proxy action in Lebanon or Iraq

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Last Updated: Jan 11, 2020, 05.53 PM IST
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Mideast Tensions
The more worrisome issue for markets’ point of view was that Iran pulled out from the nuclear accord signed with world powers in 2015
By DK Aggarwal

DK Aggarwal
Calendar year 2020 started with the intimidation by Great America, as prescribed by President Donald Trump after he took office at The Oval. With a strong military base across West Asia, especially in Iraq, Trump directed a drone strike and killed one of Iran's most powerful generals, raising fears of a major geopolitical flareup.

Now, there is fear of tensions escalating in the region, along with the potential for retaliation and further conflict. No sooner did the news break, global markets and asset prices reacted sharply. This happened mainly due to two main reasons: First, the Iraqi government voted to expel foreign troops from its soil under a non-binding mode, which seemed highly impossible to implement as that may pave way for the re-entry of ISIS.

Second, and also the more worrisome issue for markets’ point of view was that Iran pulled out from the nuclear accord signed with world powers in 2015, which may allow it to build nuclear weapons.

There was also fear among investors that an escalation in the US-Iran tensions could disrupt regional crude supplies. Oil indeed was the biggest beneficiary of the rising tensions and crude prices saw a steep rise to above $70 level. Gold prices zoomed to a seven-year peak of $1,574 in the international market.

A spike in oil prices may deal a body blow to the world economy, already struggling due to the trade tensions. Meanwhile, global markets remained skeptical of any immediate diffusion of the conflict, especially given the memories one has from the 1970s oil shock.

Although the tensions have cooled off for the time being, they have not dissipated entirely. There is speculation that Iran may engage in some proxy action in Lebanon or Iraq. In case there is retaliation, oil price may rise further and that would mess with macroeconomic arithmetic in countries like India, which import more than 80 per cent of their crude oil requirement.

The rupee may come under pressure and a global risk-off sentiment may shrink foreign flows to emerging economies. For the time being, markets look relaxed after President Trump indicated that both countries may want to avoid a crisis. Even crude oil prices have cooled off quite a bit. But it remains to be seen how the situation pans out going forward.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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