The Treasury market’s response to last week’s assassination of Qasem Soleimani in Iraq was telling. Yields fell sharply even as oil prices jumped to a seven month high. Bond investors have a long memory: previous Gulf wars caused only a temporary spike in inflation. The Arab – Israeli war of 1973 set off an inflationary spiral. But the Gulf wars (1990/91 and 2003 onwards) had only a short-lived impact on oil.
The oil market today is awash with excess capacity. Clearly, an extended war drawing in Saudi Arabia could prove hugely disruptive. It would also deflect attention from the overriding policy imperative facing all nations – tackling climate change. Australia’s bushfires should be a big wake-up call for world governments. There is a real danger that the impetus for immediate action will be lost if military action escalates in the Middle East.
The drop in Treasury yields reflects the very obvious risks to economic growth in 2020: the manufacturing ISM for December was very disappointing, with the new orders index dipping to 46.8, the lowest since April 2009.
The prospect of another Gulf war is unnerving for equity investors. But it is important not to lose sight of the technological trends that have helped drive the current economic cycle, and made it the longest on record (in the US at least). There will be two big themes driving IT investment in 2020. First, and most obviously, will be the rapid take-up of 5G services. The second theme will be the ongoing shift towards smaller chips that will benefit many tech-related goods, and drive the provision of cheaper services.
