Pricing the Iran War's Future — Are Markets Right?

**Ed Elson** (0:00)
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**Ed Elson** (1:37)
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Welcome to Prof G Markets. I'm Ed Elson. It is March 11th. Let's check in on yesterday's market vitals. The major indices initially climbed as oil shock fears were tempered, but they ultimately closed flat. Crude oil prices declined, the dollar fell, and Bitcoin jumped above $70,000. Okay, what's happening? The war with Iran is escalating. US Defense Secretary Pete Hegseth told reporters at a Pentagon press conference on Tuesday that Iran was, quote, badly losing.

**Pete Hegseth** (2:37)
Today will be yet again our most intense day of strikes inside Iran. The most fighters, the most bombers, the most strikes, intelligence, more refined and better than ever.

**Ed Elson** (2:52)
Hegseth's comments came just hours after President Trump suggested the war would end, quote, very soon. However, Trump also warned that the US would hit Iran, quote, 20 times harder than they have been hit thus far if Tehran stops the flow of oil through the Strait of Hormuz. An Iranian official said the country is absolutely not seeking a ceasefire. At least 20 countries are now militarily involved, making it one of the biggest conflicts since the Cold War. Meanwhile, the energy market is on edge. The Strait of Hormuz remains effectively closed, and Abu Dhabi's Ruwais refinery, one of the biggest in the world, halted operations after a drone strike nearby.
Saudi Aramco CEO Amin Nasser warned of catastrophic consequences if the war drags on. Oil has continued its volatile ride. Brent crude after spiking up to $119 on Monday, fell to 85 by midday on Tuesday. So we have lots to talk about. We are joined by another expert panel. We've got Katie Martin, Markets columnist and editorial board member at the Financial Times, and also Justin Wolfers, professor of economics and public policy at the University of Michigan. Two of our favorites, Katie and Justin. Thank you so much for joining us on the show. Katie, I'm going to start with you. It's been hard to make sense of the market's reactions to what's happening here, because it seemed that originally markets were not too worried about it. You wrote about this. Everything from stocks to bonds to gold seemed to be behaving in the opposite way you would expect if there was some global catastrophe that might be unfolding. Then it seems to kind of reverse oil prices spike. But down again, I'm struggling to make sense of it myself. What do you make of how the markets have digested what's happening in Iran?

**Katie Martin** (4:44)
Yeah, it was quite a weird market reaction to this whole situation. So the oil price shot higher and that much makes kind of instinctive sense. But then the other things that tend to go hand in hand with a big geopolitical shock like that, like gold generally goes up, the Swiss franc generally goes up, the yen generally goes up, bonds generally go up in value and push down borrowing costs. The opposite of all those things happened. So gold went down a little bit, certainly didn't sort of strike any new highs, the Swiss franc weakened, the yen weakened, bonds weakened on the potential inflationary impact of having higher oil prices. And also what you saw was the stocks that did the worst, the most heavily affected stock indices were those in Asia, for example, and a lot of those in Europe. And I think what that is telling you is that investors were not saying, this is the end of the world, this is equivalent to the 1970s oil shock, this is equivalent to 9-11. What they were saying was, I'm just going to take a few profits on some very successful bets that I've had running for quite a long time. I'm just going to take a little bit of risk off the table. But they weren't sort of running to the hills and scrambling for safety. So it's been really quite a confusing market response to what we've seen. But I think the one that will be the most durable and the one that we need to pay most attention to is that bond markets, government bond markets were very sensitive. They are really very much on a knife edge, worried about a resurgence in inflation.