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Investors fear U.S. involvement in Israel-Iran conflict

could

affect stock markets

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Oil prices may rise sharply if U.S. attacks Iran,

impacting

global economy

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Dollar gains as investors seek safe haven

By Noel Randewich

June 18 (Reuters) - Financial markets may be in for a

"knee-jerk" selloff if the U.S. military attacks Iran, with

economists warning that a dramatic rise in oil prices could

damage a global economy already strained by President Donald

Trump's tariffs.

Oil prices fell nearly 2% on Wednesday as investors weighed

the chance of supply disruptions from the Israel-Iran conflict

and potential direct U.S. involvement. The price of crude

remains up almost 9% since Israel launched attacks against Iran

last Friday in a bid to cripple its ability to produce nuclear

weapons.

With major U.S. stock indexes trading near record highs

despite uncertainty about Trump's trade policy, some investors

worry that equities may be particularly vulnerable to sources of

additional global uncertainty.

Chuck Carlson, chief executive officer at Horizon Investment

Services, said U.S. stocks might initially sell off should Trump

order the U.S. military to become more heavily involved in the

Israel-Iran conflict, but that a faster escalation might also

bring the situation to an end sooner.

"I could see the initial knee-jerk would be, 'this is bad',"

Carlson said. "I think it will bring things to a head quicker."

Wednesday's dip in crude, along with a modest 0.3% increase in

the S&P 500, came after Trump declined to answer

reporters' questions about whether the U.S. was planning to

strike Iran but said Iran had proposed to come for talks at the

White House. Adding to uncertainty, Iranian Supreme Leader

Ayatollah Ali Khamenei rejected Trump's demand for unconditional

surrender.

U.S. Treasury yields fell as concerns over the war in Iran

boosted safe haven demand for the debt.

The U.S. military is also bolstering its presence in the region,

Reuters reported, further stirring speculation about U.S.

intervention that investors fear could widen the conflict in an

area with critical energy resources, supply chains and

infrastructure.

With investors viewing the dollar as a safe haven, it has

gained around 1% against both the Japanese yen and Swiss franc

since last Thursday. On Wednesday, the U.S. currency took a

breather, edging fractionally lower against the yen and the

franc.

"I don't think personally that we are going to join this

war. I think Trump is going to do everything possible to avoid

it. But if it can't be avoided, then initially that's going to

be negative for the markets," said Peter Cardillo, Chief Market

Economist at Spartan Capital Securities in New York. "Gold would

shoot up. Yields would probably come down lower and the dollar

would probably rally."

Barclays warned that crude prices could rise to $85 per

barrel if Iranian exports are reduced by half, and that prices

could rise about $100 in the "worst case" scenario of a wider

conflagration. Brent crude was last at about $76.

Citigroup economists warned in a note on Wednesday that

materially higher oil prices "would be a negative supply shock

for the global economy, lowering growth and boosting

inflation-creating further challenges for central banks that are

already trying to navigate the risks from tariffs."

Trump taking a "heavier hand" would not be a surprise to the

market, mitigating any negative asset price reaction, Carlson

said, while adding that he was still not convinced that the U.S.

would take a heavier role.

Trades on the Polymarket betting website point to a 63%

expectation of "U.S. military action against Iran before July",

down from as much as an 82% likelihood on Tuesday, but still

above a 35% chance before the conflict began last Friday.

The S&P 500 energy sector index has rallied over 2%

in the past four sessions, lifted by a 3.8% gain in Exxon Mobil

and 5% rally in Valero Energy. That compares to a 0.7% drop in

the S&P 500 over the same period, reflecting investor concerns

about the impact of higher oil prices on the economy, and about

growing global uncertainty generated by the conflict.

Turmoil in the Middle East comes as investors are already

fretting about the effect of Trump's tariffs on the global

economy.

The World Bank last week slashed its global growth forecast for

2025 by four-tenths of a percentage point to 2.3%, saying that

higher tariffs and heightened uncertainty posed a "significant

headwind" for nearly all economies.

Defense stocks, already lifted by Russia's conflict with

Ukraine, have made modest gains since Israel launched its

attacks. The S&P 500 Aerospace and Defense index hit

record highs early last week in the culmination of a rebound of

over 30% from losses in the wake of Trump's April 2 "Liberation

Day" tariff announcements.

Even after the latest geopolitical uncertainty, the S&P 500

remains just 2% below its February record high close.

"Investors want to be able to look past this, and until we see

reasons to believe that this is going to be a much larger

regional conflict with the U.S. perhaps getting involved and a

high chance of escalating, you're going to see the market want

to shrug this off as much as it can," Osman Ali, global co-head

of Quantitative Investment Strategies, said at an investor

conference on Wednesday.