Markets Ignore West Asia Risks; Oil Shock Could Turn Systemic, Warns Jefferies

The report underscores a striking disconnect between geopolitical realities and market behaviour, noting that "the only way to explain why financial markets have not sold off more on the continuing "Middle East news flow is that investors' base case remains" limited escalation, ' an assumption that is increasingly being challenged by events on the ground.

Jefferies highlights that this complacency persists despite clear signs of intensification, including US military mobilisation and direct conflict dynamics involving Iran. "For such reasons, the course of military escalation cannot be ruled out altogether, and it is certainly not discounted in current market valuations," the report cautioned.

A central concern flagged is the disruption to critical energy supply routes. The partial closure of the Strait of Hormuz, a chokepoint for global oil flows, is already pushing crude prices higher, with broader implications for inflation and global growth.

Quoting industry leadership, the report warns of severe systemic fallout if disruptions persist:

"It's clear to me that if this crisis lasts more than three or four months, it will become a systemic problem for the world. We cannot have 20% of crude oil... stranded in the Gulf... without any consequence."

Jefferies further notes that the market may be underestimating the second-order effects of rising energy costs, particularly on sectors like technology, where "rising energy costs can escalate the cost of data centre construction, given that AI is hugely energy-dependent."

The report also points to broader geopolitical spillovers, including disruptions in the Red Sea and renewed Houthi activity, reinforcing the risk of a multi-front supply shock.

Despite these developments, asset prices have not fully adjusted to reflect the potential for prolonged disruption. The brokerage suggests that investors are still anchored to an optimistic baseline scenario--one that may prove increasingly untenable if escalation continues.

Jefferies' assessment notes that markets remain behind the curve in pricing the severity of the West Asia crisis and the inflationary impulse from crude oil, even as the probability of sustained supply disruption rises materially.

- ANI