Why don't markets react?

The headlines from last week about the war in the Middle East are shocking, at least in terms of generating some concern among people, but they have had very little impact on the markets.

Stock markets are rising, interest rates are falling, exchange rates are barely changing, only oil has seen a significant jump.

This still surprising behavior could have several explanations. The first is that disruptive events similar to the current one since World War II generate significant adjustments that are quickly reversed. This was the case in October 2023, for example, when Hamas invaded Israel.

Market participants appear to be perceiving that the economic impact of the current conflict between Israel and Iran may be limited.

In the case of oil, the conflict is arising at a time of excess inventories, according to figures from the International Energy Agency.

Members of the Organization of the Petroleum Exporting Countries (OPEC) have recently been struggling to reduce production levels, with little success.

Although there is a risk that oil supplies could be disrupted if Iran blocks the Strait of Hormuz, this would not immediately disrupt economic activity in developed countries.

According to analysis of previous periods of tension, the price of oil would have to double to trigger a recession in the United States or a spike in inflation.

Central bank decisions appear to be dominant today. Monetary policy decisions (interest rates, liquidity, inflation) weigh more heavily on the markets than almost all the geopolitical events we've seen in recent decades.

In an environment where the Fed or the ECB could be adjusting benchmark interest rates, investors continue to prioritize macroeconomic data (inflation, employment, GDP) over external events.

Markets don't react to news itself, but to how that news changes their expectations about the future.

If the war does not significantly alter inflation, global growth, or central bank decisions, then its effect on markets may be limited or short-lived.

Of course, the event could escalate and generate such perverse effects, but so far, investors aren't discounting this. That doesn't mean the uncertainty surrounding tariffs, the direction of the economy, and inflation has disappeared; on the contrary, the geopolitical risk is growing in intensity with the conflict.

It's hard to imagine that stock markets will continue to rebound with such a risk burden. This week sees important announcements from the major central banks, and for the moment, the escalating conflict between Israel and Iran has overshadowed the G7 meeting; although the Fed's statement this Wednesday may be a more important event.

The environment is still fraught with risk and uncertainty, making it difficult to make investment decisions, and in the chaos of the stock market, it's hard to remain optimistic.

*Rodolfo Campuzano Meza is the general manager of INVEX Investment Fund Operator.