Why are the tensions in the Middle East affecting our sharemarkets?

List of risks to global economic growth:

Bird flu? Check
Interest rate rises? Check
Inflation risks? Check
Oil price hikes? Check
Errant missiles in the middle east? Missed that one.

Just when we thought we’d seen enough volatility in the All Ordinaries index, S&P200 index (and the Dow Jones for that matter) for the time being, Israel and Lebanon began their ugly assault against innocent civilians. Well, that’s how I see it.

One answer to the question of why the tensions in the Middle East is affecting our share markets is that Middle East is critical to the world’s energy needs.  This Middle East is the heart of oil country.  Any disruption in the flows means higher prices.  Last Friday, the Australian share market shed 2 per cent as escalated tension in the Middle East and the accompanying rising crude oil prices spooked investors.  The Dow Jones lost 1.5 per cent as oil prices jumped to a fresh record of $US76.70 a barrel (will it get to $US80.00?).  Markets around the world are selling out of positions, which is an immediate reaction. There could be a softening in this pace as the markets start to digest the global factors.

Another answer is simply fear – fear that the tensions will escalate into a full-blown war.  Our markets track offshore share markets (“when America sneezes, Australia catches a cold”), but the market volatility is widely due to investor caution as a result of what is going on politically.