In the short-term, we expect a contained impact on oil prices, growth and inflation. Our model suggests an upward revision of our central oil price scenario from 62 USD/bbl to USD 65.5 in 2020. A short-lived temporary peak of 100 USD/bbl is conceivable should a situation of extreme tensions reoccur repeatedly. A sustainable increase of 10 USD/bbl in oil prices would cut global growth by around -0.1pp per year and increase global inflation by +0.3pp per year. 

In the medium-term, U.S. foreign policy is likely to continue being a source of uncertainty.  The U.S. is progressively disengaging from being an important provider of world public goods (of security), President Trump’s foreign policy could be influenced by domestic factors such as the impeachment proceedings and the 2020 Presidential elections. In game theory, President Trump would be a so-called maximax player, maximizing gains no matter the risk. The confrontation between Iran and the U.S. is likely to remain high over the next months, while uncertainty originitating in the US will weigh on global growth.

What does it mean for markets? Inflation expectations and equity markets are expected to react to short-term volatility only, as the negative impact on fundamentals is likely to remain limited. According to our estimates, a stabilization of oil prices at 80 USD/bbl at an horizon of one year would only trigger a correction of 2% of MSCI world. However, the negative impact on the MSCI world index increases significantly after one year, to -9% (after 20 months) should oil prices remain at 80 USD/bbl. Given the fact that we describe a regime of higher uncertainty, gold prices are the likely winners of this situation.