Markets spooked after Israel launches retaliatory strike on Iran

   2024-04-19 08:04

Updated

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Australian stocks fell to a three-month low while gold and oil surged after Israel reportedly launched a retaliatory strike on Iran less than a week after Tehran’s rocket and drone swarm, fuelling fears of a widening Middle East war.

Iran’s air defences shot at a suspected small number of drones and several explosions were reported near a military base and nuclear site near the central city of Isfahan. Another group of drones was reportedly shot down near Tabriz, 800 kilometres further north.

Volunteer troops of the Iranian army march during Army Day parade on Wednesday. AP

The International Atomic Energy Agency confirmed there had been no damage to nuclear sites, while Tehran said it had no plans for an immediate retaliation against Israel.

“The foreign source of the incident has not been confirmed. We have not received any external attack, and the discussion leans more towards infiltration than attack,” a senior Iranian official told Reuters.

The Albanese government said it was “extremely concerned about the potential for miscalculation and further escalation of conflict in the region” after the Israeli strike.

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“This is in no one’s interests. We urge all parties to exercise restraint and step back to avoid a further spiral of violence,” acting Foreign Minister Katy Gallagher said.

Tension is high in the Middle East over possible Israeli retaliation after Iran fired more than 300 armed drones and missiles at Israel last weekend, the first time Tehran has targeted the country directly from its own soil.

US President Joe Biden had counselled Israel against responding to that attack, saying the fact so many Iranian drones and missiles had been intercepted was a major victory for Israel.

The Australian sharemarket hit a three-month low following news of Friday’s strike, down 2.8 per cent for the week and closing out its worst week in more than six months. Equity markets in Japan and Hong Kong also fell and futures for European and US stockmarkets sank. The Australian dollar lost 0.8 per cent on the news to buy $US63.7¢ at a five-month low.

The regional escalation also briefly sent the price of gold back near its record high above $US2400 an ounce and Brent crude rose above $US90 a barrel. Both commodities pared gains after the International Atomic Energy Agency confirmed there has been no damage to Iran’s nuclear sites.

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Treasurer Jim Chalmers warned his international counterparts at a G20 finance ministers meeting in Washington on Friday that rising Middle East tensions risked further volatility in international markets and an oil price spike.

“The increasingly complex and concerning set of conditions we face in the global economy presents a profound challenge for policymakers,” Dr Chalmers said.

While the federal government is still likely to record a second budget surplus in May, Dr Chalmers said the global economy was slowing, and he had concerns about global spillovers from China’s embattled property sector.

“The soft landing we seek at home and in the global economy is still assumed but still not assured,” he said.

The Washington-based IMF this week warned asset markets could face a sharp sell-off if geopolitical tensions caused inflation to re-accelerate.

“If inflation remains high, such lofty expectations [for rate cuts] could topple, which could lead to a correlated sell-off of assets, from bonds to stocks to crypto assets,” IMF financial counsellor Tobias Adrian said.

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AMP chief economist Shane Oliver said the huge gains in global equity markets since October had left them vulnerable to a bout of volatility or a correction, which he said was now unfolding due to the escalation of tensions in the Middle East.

“Iran produces about 3 per cent of global oil supply and about 20 per cent of global oil flows through the Strait of Hormuz both of which could be threatened by a war involving Iran,” Dr Oliver said.

“From their recent highs global and Australian shares have fallen by around 4 per cent to 5 per cent and the short-term risks remain tilted towards further falls.”

Israel silent on strike

Israel did not comment on the strike, in keeping with its usual policy. But The New York Times reported Israeli officials, speaking anonymously, saying they had claimed credit for the attack.

Israeli forces have conducted scores of airstrikes against Iran-affiliated forces as part of an increasingly overt confrontation across the Middle East during the past decade.

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The Pentagon earlier said that US Defence Secretary Lloyd Austin spoke to his Israeli counterpart Yoav Gallant on Thursday (Friday AEST) to discuss “regional threats and Iran’s destabilising actions in the Middle East”.

CNN reported a US official had also attributed the strike to Israel. Israel advised the US on Thursday that it planned to carry out a retaliatory strike after Iran targeted a barrage of drones and missiles at Israel last weekend, the vast bulk which were shot down without doing major damage.

That action was in retaliation for Israel earlier killing senior Iranian commanders in a strike against an Iranian diplomatic compound in Syria.

Iranian state media downplayed the impact of Friday’s events, suggesting Tehran’s hardline Islamic regime was not seeking to escalate.

Airspace was reopened after being closed briefly over Iran while TV broadcasts ran footage of normal life in Isfahan.

State TV IRNA said air defences had been activated at a major air base in Isfahan, which has long been home to Iran’s ageing fleet of American-made F-14 Tomcats – purchased before the 1979 Islamic Revolution.

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A video still from near the reported site of airstrikes in Isfahan. Twitter

Tasnim, a semi-official news agency in Iran associated with the Islamic Revolutionary Guard Corps, later published a video of anti-aircraft guns from one of its reporters who said he was in the south-eastern Zerdenjan area of Isfahan, near its “nuclear energy mountain”.

Hossein Dalirian, a spokesperson for an Iranian government cyberspace agency who as a journalist had ties to Iranian defence officials, said on the social media platform X that several small “quadcopter” drones had been shot down. Media reports claimed that the drones appeared to originate from within Iran.

The muted reaction was in stark contrast to earlier Iranian warnings against Israel. Before Friday’s incident, Iranian President Ebrahim Raisi had promised Tehran would deliver a “severe response” to any attack on its territory.

Iran also earlier warned Israel that it was likely to review its nuclear stance if its atomic facilities are threatened.

A top Iranian general didn’t specify what the change might be, but Tehran has long said its nuclear program, which has prompted concern from the US, Israel and the United Nations for years, is solely for peaceful purposes.

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Islamic Revolutionary Guard Corps commander Ahmad Haghtalab also said such an attack would prompt a tit-for-tat attack on Israel’s nuclear facilities.

With wires

Michael Read is the Financial Review’s economics correspondent, reporting from the federal press gallery at Parliament House. He was previously an economist at the Reserve Bank of Australia and at UBS. Connect with Michael on Twitter. Email Michael at [email protected]

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