(Bloomberg) — Airlines and hotels stocks slid, while energy and defense stocks jumped, as global equities opened the week in risk-off mode following US and Israeli strikes on Iran.
In Europe, the Stoxx 600 Index fell as much as 1.9% at the the open, with hotelier Accor SA and British Airways owner IAG SA among the steepest fallers on concerns that surging fuel costs and possible airspace disruptions would hit the travel sector. By contrast, oil major Equinor ASA and UK defense contractor BAE Systems led gains in their respective sectors.
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Investors are grappling with the risk that the conflict in the Middle East could disrupt global energy supplies and stoke inflation. The reaction was most pronounced in oil, with Brent crude surging as much as 13% before paring gains.
“The situation remains highly fluid, and it is uncertain how long this conflict will last, with potential risks to energy supplies, sea freight in the straight of Hormuz, air travel and tourism,” wrote Barclays Plc strategist Emmanuel Cau. He sees the quality theme as a “a good place to hide” following a recent de-rating, along with energy and commodity stocks, with the bullish case for defense stocks being reinforced.
According to Michael Kantrowitz, chief investment strategist at Piper Sandler & Co., oil prices are likely to be the primary driver of moves in stock markets. “Equities will be under pressure until oil prices stop rising,” he said.
S&P 500 futures declined as much as 1.7%, broadly mirroring declines in Asia, where equities trimmed initial losses. MSCI AC Asia Pacific Index slumped 1.8%.
Citigroup Inc. upgraded UK equities to overweight from underweight, saying the market is tilted heavily toward commodities and defensive sectors and serves as an effective “geopolitical hedge.” The bank downgraded Japan to underweight from overweight.
As trading kicks off in markets across Asia, Europe and the US, here are the sectors to watch:
Energy
Major energy companies saw strong gains across Europe and Asia. Norway’s Equinor rose as much as 10%, while Spain’s Repsol gained as much as 8.2%. Australia’s Woodside Energy Group Ltd. and Hong Kong-listed PetroChina rose 6.8% and 4.1%, respectively. Investors will also be watching US oil majors including Exxon Mobil Corp. and Chevron Corp.
“It’s just a matter of what impact will Iran’s response have on the global oil supply — at least temporarily, and then maybe longer term,” said Rob Thummel, a portfolio manager at Tortoise Capital. Any spike in prices could prove short-lived if supplies aren’t severely disrupted, he said. In one scenario Thummel sees as less likely, a prolonged closure of the Strait of Hormuz could push prices above $100 per barrel.
