In the latest edition of My Thoughts on Currencies, Stephen Jen examines the market implications of the Iran War, describing it as a stagflationary shock that has interrupted an otherwise constructive global backdrop.
Stephen argues that the conflict has pushed markets from “Goldilocks” toward stagflation, with equities under pressure, bonds struggling to provide their usual safe-haven offset, and the dollar rallying. However, he views this as a temporary deviation rather than a lasting change in the underlying direction of markets.
As Stephen writes:
“Since the last My Thoughts, the world and the financial markets look a bit different: the military operations in Iran pushed the world from Goldilocks to stagflation.”
A key part of the note is Stephen’s view that the technology cycle remains the more important medium-term force. He frames the current environment as a clear example of a “K”, with the Iran-related energy shock forming the lower leg and the technology revolution forming the upper leg.
“This is probably the most glaring ‘K’, that, on the one hand, we have a generational and historical technological revolution and, on the other hand, we have the most basic and familiar of all conflicts and shocks.”
The note also revisits Stephen’s “Dollar Smile” framework. The dollar’s safe-haven rally during the Iran shock, he argues, confirms that the left side of the smile remains relevant, even if the move has been more modest than in previous periods of market stress.
As Stephen notes:
“Even without a rally in US Treasuries, we can confirm that the Smile's convexity remains, and that an overvalued currency like the dollar can still attract some safe-haven flows.”
Stephen also maintains a constructive view on selected risk assets if the conflict proves short-lived. He highlights emerging market equities as potentially attractive, particularly if markets begin to price a return to the pre-war trend.
“When the US signals the end of operations in Iran, I think EM equities will stage a strong rebound.”
The broader message of the note is that the Iran War has created a serious but potentially temporary shock. Stephen continues to see the technology cycle, global capex, and the resilience of the private sector as important supports for risk assets once the immediate geopolitical pressure eases.
To explore more of our research on currencies, geopolitics, oil shocks and global macro strategy, register for a trial of our research service below.
Request a free trial
|
Disclosure
This communication is issued by Eurizon SLJ Capital Limited (“ESLJ”), a private limited company registered in England (company number: 09775525) having its registered office at 90 Queen Street, London EC4N 1SA, United Kingdom. ESLJ is authorised and regulated by the Financial Conduct Authority (FRN: 736926). This communication is treated as a marketing communication intended for professional investors only and is provided only for information purposes. It has not been prepared in accordance with legal and regulatory requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. It does not constitute research on investment matters and should not be construed as containing any recommendation, advice or suggestion, implicit or explicit, with respect to any investment strategy or financial instruments, or the issuers of any financial instruments, or a solicitation, offer or financial promotion relating to any securities or investments. ESLJ and its affiliates do not assume any liability whatsoever for the contents of this communication, save to the extent agreed in any written contract entered into between ESLJ and the recipient, and do not make any representation or warranty as to the accuracy or completeness of any information contained in this communication. Views are accurate as at the time of publication. Opinions expressed by individuals are their own and do not necessarily reflect those of ESLJ or any of its affiliates. The value of any investment may change and an investor may not get back the original amount invested. Past performance is not an indicator of future performance. This communication may not be reproduced, redistributed or copied in whole or in part for any purpose. It may not be distributed in any jurisdiction where its distribution may be restricted by law and persons into whose possession this communication comes should inform themselves about, and observe, any such restrictions.
ESLJ-171125-R1
Subscribe to our insights
If you are interested in our content, please sign up below and we will deliver Eurizon SLJ insights right to your inbox.
I consent to my data being collected and stored for the purposes of providing me information regarding my enquiry and related services. If you have any questions about your data please contact us at research@eurizonslj.com
Our Research
Our written research products aim to provide unique and orthogonal insights on key global economic and policy issues in a timely fashion.
