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Mohamed A. El-Erian

Muted Market Reaction to Iran Strike Overlooks Key Uncertainties

Investors should resist the temptation to ignore longer-term concerns.

The issues are greater than geopolitical conflict.

The issues are greater than geopolitical conflict.

Photographer: Joel Saget/AFP/Getty Images

The immediate market reaction to the U.S. air strike that killed a top Iranian general was a textbook one, but it also raised short- and medium-term issues that have not been sufficiently internalized by traders and investors. As long as the conflict between the two countries doesn’t intensify, market participants will most likely be tempted to quickly brush off the initial risk-off reaction and play down the longer-term issues. That would be understandable, but it would also be too partial a response in balancing favorable short-term market conditions with mounting longer-term uncertainties.

The killing of Qassem Soleimani is a significant escalation in what has been a protracted period of low-intensity tensions and asymmetric warfare. Unsurprisingly given Soleimani’s position and standing within the country, Iran’s supreme leader, Ayatollah Ali Khamenei, has promised a major retaliation against the U.S. This comes in a region already littered with proxy wars and asymmetric tactics that continue to pull in external actors, including Turkey’s decision this week to intervene in Libya.