Investors choose safe havens, oil over equities as Middle East erupts

By Sinéad Carew and Amanda Cooper

NEW YORK/LONDON (Reuters) -U.S. investors on Friday sought refuge in safe-haven assets like the dollar and gold, as oil prices surged after Iran retaliated against Israel's biggest-ever military strike against the major crude producer.

Iran launched airstrikes at Israel hours after unprecedented Israeli strikes, stoking some fears of a broader regional conflagration. Explosions were heard on Friday in Jerusalem and Tel Aviv, the country's two biggest cities. Earlier, Israel blasted Iran's huge Natanz underground nuclear site and killed its top military commanders.

Investors said the markets would probably muddle through the latest hostilities unless Iranian oil facilities were attacked or other countries are drawn into the war. Worries about possible disruptions to oil shipments prompted crude prices to spike as much as 14%. Oil futures settled 7% higher on the day.

"We're entering the next phase of the conflict here with the Iranian response," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Southfield, Michigan.

The money manager said he expected "a bit more of a flight-to-quality trade if we see stocks sell off further" and that this could benefit gold and Treasuries.

"The question is still how long will this persist? How intense will it be? Will other parties be drawn in? From a big picture economic perspective, I don't think it changes anything materially," he said.

Safe-haven gold prices rose more than 1% and Wall Street's three major equity indexes ended down more than 1%.

The outbreak of war brought oil prices into focus. Iran is among the world's largest exporters of crude and borders the Strait of Hormuz, a major choke-point for crude tankers through which roughly a fifth of global consumption flows and which Iran has previously threatened to close in retaliation to Western pressure.

As oil prices surged and investors sought safe havens, U.S. government bond yields rose on bets that higher energy prices could stoke inflation.

Still, despite the spike in crude prices, the global benchmark Brent remained well under $80 a barrel. Irene Tunkel, Chief U.S. Equity Strategist at BCA Research said she does not see long-term U.S. market implications unless prices soar above $100 a barrel, which would hurt consumer spending.

She said that was unlikely unless oil infrastructure is destroyed or "Iran somehow closes the Strait of Hormuz and (the conflict) spills out of Iran and energy production in Iraq is shifted."

The strategist also noted that the S&P 500 pullback on Friday, followed a strong rally from April lows.

U.S. President Donald Trump said there was still time for Iran to halt the Israeli attacks by reaching a deal to curb its nuclear programme.

The attacks came at a time when investors were wondering how central banks would handle interest rates if U.S. consumer prices rise due to Trump's tariffs.

Jack Janasiewicz, portfolio manager at Natixis Investment Managers in Boston, said the potential for higher inflation from rising oil prices looked "less supportive" for U.S. government bond prices. But he noted that investors typically take geopolitical crises in their stride.

"Historically speaking with these kind of geopolitical events, you get the knee-jerk reaction from the market but the longer-term ramifications tend to fade. History tells us to kind of look past a lot of this stuff," said Janasiewicz.

OIL PRICE RALLY

Janasiewicz said the ultimate gains in oil prices will depend on how long the war lasts and whether U.S. supply could be ramped up to cap prices if there is a supply disruption.

"From a U.S. perspective it's at least a little bit more insulated because domestic producers could certainly ramp up" production, Janasiewicz said.

The dollar index, which has recently borne the brunt of investor risk aversion, again took up the mantle of safe haven on Friday and was last up about 0.5%.

"The dollar is reverting to that traditional role of safe haven, which we haven't seen for months," City Index strategist Fiona Cincotta said.

Despite Wall Street's sell-off, stock prices were still not far off record highs, and some investors had warned that market participants may not be cautious enough.

Marlborough fixed income fund manager James Athey said there was a risk investors dive back into riskier assets too quickly if tensions do not ratchet up quickly from here.

"In general, markets tend to look through these sorts of events quite quickly but of course therein lies the risk of complacency," he said.

"The situation is genuinely tense and fraught and risk assets are still priced for perfection," he said.

(Reporting by Sinéad Carew in New York, Amanda Cooper and Dhara Ranasinghe in London. Additional reporting by Ankur Banerjee in Singapore; Editing by Elisa Martinuzzi, Toby Chopra and David Gregorio)