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Investing.com - The path of oil prices will likely dictate the trajectory of stocks over the near term, as investors eye ongoing violence in the Middle East, according to analysts at Citigroup (NYSE:C).
In a note to clients, the brokerage flagged that these types of "geopolitical flare-ups" typically have a "transitory impact on stocks" outside of sustained surges in energy prices.
"Should geopolitical risks continue to rise, relative outperformers would typically include the European energy sector, traditional defensives [stocks], Switzerland, and the United Kingdom (TADAWUL:4280)," the analysts wrote.
They added that global equity market valuations had embedded relatively "average" levels of "geoeconomic risk" leading into the recent escalation in tensions between Israel and Iran.
Oil prices inched down on Wednesday, easing back from a 4% uptick in the previous session, as markets assessed the possibility of crude supply disruptions because of the Israel-Iran conflict and the effect of a looming Fed interest rate decision on demand.
Brent crude futures had fallen by 0.3% to $76.20 a barrel, but remained above $76 for a second consecutive day. West Texas Intermediate crude futures dipped by 0.3% to $73.02 per barrel by 03:30 ET.
Meanwhile, U.S. stock futures pointed higher.
Israel’s air force said in a social media post that it had carried out strikes on centrifuge and weapons production facilities in the Tehran area on Wednesday, adding that the targets were attacked as part of a broader military effort to damage Iran’s "nuclear weapons program and missile production industry."
Tensions in the Middle East have intensified since Israel launched airstrikes at Iranian nuclear sites last Friday. Israel has continued to fire waves of missiles into Iran, leading to retaliatory volleys. Casualties have been recorded on both sides.
The role of the U.S. in the conflict remains a major focus. Trump has demanded an "UNCONDITIONAL SURRENDER" from Iran and claimed at Supreme Leader Ayatollah Ali Khamenei was an "easy target." He also seemed to suggest that U.S. had helped Israel in establishing "complete and total" air superiority over Iran.
U.S. Vice President JD Vance later said that Trump was only interested in using the American military to "accomplish the American people’s goals," but noted that the president could still "decide he needs to take further action" to prevent Iran from enriching uranium.