Safe-haven assets likely to rally as Middle East tension deepens

New Delhi:  Safe‑haven currencies, from the dollar to the yen and gold, are expected to rally and equity sentiment could worsen due to supply chain disruption amid escalation of the US-Iran war, a report said on Wednesday.

The report from DBS Bank said spreads of sovereign and corporate bonds could widen as investors while the monetary policy will stay put in the near term.

Taimur Baig, Chief Economist, DBS Bank, warned that despite the Iranian Navy’s warships posing minimal threat, the country’s ability to deploy mines and asymmetric attacks in the Strait of Hormuz could slow shipments, raise insurance, shipping costs and energy prices.

“With Kurds in the north and Baluchis in the south, regime change may coincide with wars of cessation, dragging in several countries in the region, from Turkey to Iraq,” Baig said.

A prolonged closure of Hormuz will cause huge disruption to the global oil trade given that even the spare oil capacity from gulf producers has to pass through this strait, the bank said.

In the event of a full-fledged crisis, the strategic stocks in the US will also be insufficient to offset the damage, it said.

The bank forecasted that crude could hit $100–150 per barrel, in an extreme scenario of a full blockage of the Strait, raising inflation expectations, limiting the room for the Fed to cut rates and raising the risk of a global recession. Hou Wey Fook, Chief Investment Officer, DBS Bank said a flight to safe haven assets would favour treasuries and gold.

“We do not subscribe to the notion that silver can act as a substitute for gold as a portfolio risk diversifier as silver has around 60 per cent of its demand from industrial applications and a smaller market size,” he added.

The lack of strategic vision and clarity heightened the risk of the US embroiling in another “forever war,” the bank warned.

—IANS