For much of 2014, equities advanced despite disturbing world news headlines. However, that changed last week, as U.S. stocks slipped amid news of the escalating violence in Iraq.
Why the different stock market reaction? The events in Iraq pose a greater risk for markets than earlier 2014 geopolitical turmoil because there is a clear link between the conflict in Iraq and the global economy: energy prices.
As I write in my new weekly commentary, oil prices spiked last week as sectarian violence escalated in Iraq, a country producing more than 3 million barrels of oil per day, at a time when production has already been falling in many other parts of the Middle East, neutralizing the benefit of surging North American oil production. West Texas Intermediate (WTI), the U.S. oil benchmark, traded above $107 per barrel, while Brent Crude, the global benchmark, hit approximately $114 per barrel.
While a short-term spike in oil prices due to declining production in northern Iraq is not a major threat, a prolonged price rise would put additional pressure on the global economy, including on U.S. consumers, who are still operating in a mode of caution.
As of early this week, the violence in Iraq showed no sign of abating and it appeared that the crisis in the Middle East isn’t likely to be resolved quickly.