NEW YORK (MarketWatch)—Investors paid attention to the Middle East on Thursday after Saudi Arabia launched military strikes against Iranian-backed rebels in Yemen.
But why is that moving the needle after investors have for so long been content ignoring geopolitical risk?
It comes down to oil
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Yemen isn’t exactly a major player. But geographical concerns and the fear that Saudi Arabia, the world’s swing producer, could find itself embroiled in a proxy war with Iranian-backed Houthi rebels inside Yemen were sufficient to trigger a Wednesday rally, notes MarketWatch’s Myra Saefong.
Still, analysts find it interesting that oil is rebounding off this geopolitical development after months of ignoring other potential disruptions including continued unrest in Libya, the rise of Islamic State, and the conflict between Western powers and Russia over Ukraine and other hot spots.
An old market saying holds that it isn’t the news that is important, but how the market reacts to the news.
The rebound comes after a push to six-year lows by oil earlier this month failed to attract new selling by speculators, Gene McGillian, oil analyst at Tradition Energy tells MarketWatch.
That set the stage for the Yemen news to spark a rebound as attention shifts to the idea that supplies could be affected, McGillian said. That gives comfort and a little momentum to oil bulls who have been banking on the expectation that falling rig counts and cuts to capital expenditures by oil producers will help stem surging U.S. oil production.
The fact the Yemen news is gaining traction ”is basically adding to this idea that the risk-reward now, with prices at six-year lows, seems to be poised more for a turnaround and a rebound in prices, especially as we begin to see production levels reduced by the drilling plans by the major North American producers,” McGillian said.
So does this mark a lasting shift in market psychology?
Probably not, McGillian said. Oil is also getting a boost from a respite in the dollar’s recent march to a 12-year high, as measured by the ICE dollar index, but with the U.S. currency likely to regain its momentum as the Federal Reserve moves closer to hiking interest rates, crude will be vulnerable to renewed selling pressure, he said.
Jameel Ahmad, chief market analyst at FXTM, also doubts the situation marks a lasting change in psychology, at least for the oil market. Instead, the news offered traders an “excuse” to push crude higher.
In the longer run, gold
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is likely to prove a more attractive option, Ahmad said, arguing that the Fed is likely to prove reluctant to raise interest rates this year.
Fears of a rate hike have been pressuring the metal this year. If the Middle Eastern conflict deepens. gold, with its status as a haven, is likely to rise, while gold will still be hampered by an ugly supply overhand, Ahmad said.