How Will the Financial Markets be Affected by Pulling Out of the Iran Nuclear Deal?

Trump Follows Through – Now What?

President Trump fulfilled another campaign promise by withdrawing from the Iran nuclear deal,  officially titled the “Joint Comprehensive Plan of Action.” The JCPA was never submitted to Congress by President Obama for ratification when it was first enacted in 2015.  What that means is that a Presidential executive order is all that was required to withdraw from it.

Iran’s Economy

The announcement had little overall effect on domestic stock indices.  There are two main reasons. One, the President had talked about pulling out of the deal for much of his campaign, so the action was largely expected.  Second, leaving the JCPA will have little impact on the American economy. Iran, with 80 million people, is second in population only to Egypt in the Middle East.  However, it has an economy roughly the same size as Finland. Iran’s Gross Domestic Product is $12,500 per person. For comparison, the United States’ is $52,500 per person.

Iran has an energy-dependent economy, with the world’s second largest gas reserves and the fourth largest oil reserves.  The single biggest economic impact of sanctions will be possible reduction in the sale of oil and gas by Iran. This can lead to higher oil prices unless other producers are willing to step up production.  As such, energy stocks rallied on the news (though the smart money likely bought into weakness in the sector over the past couple of years and sold into strength on the rally).

Who are the Losers?

Domestically, the imposition of sanctions probably makes Boeing the biggest potential loser.  It hoped to sell Iran aircraft worth $20 billion. Other American exports to Iran include medical devices, oilfield services and banking.  In the bigger picture however, U.S. exports to Iran since 2015 were miniscule.

European companies have the most to lose if sanctions are imposed, which is a big part of the reason why they’ve decried the U.S. leaving (remember to always follow the money in global politics).  The European Union exported $13 billion in goods to Iran last year, 100 times more than America. The sanctions announced by the U.S. prevent American companies from doing business with Iran. The Trump Administration also plans to enforce secondary sanctions on foreign companies.  Sanctions by the U.S. Treasury could impact European companies like Airbus, who planned to sell aircraft to Iran, and Volkswagen, who began exporting cars to Iran last year. Total, the French energy company, made the largest single commitment to Iran: a $2 billion deal to develop the South Pars gas field.

Minimal Fallout

Pulling out of the deal will have no noticeable impact on the American economy with one exception: it can cause a temporary increase in the price of oil, which should boost the energy sector of the U.S. stock market for a little while.  Be prepared to pay more for gas at the pump in the meantime.

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Korving & Company, Investment Management, Suffolk, VA

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