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Why Are Markets Watching The India-Pakistan Flare-Up?

Kitco News

Why Are Markets Watching The India-Pakistan Flare-Up?

(Kitco News) - India-Pakistan tensions have caught the markets off guard this week, but the reaction has been muted so far, with analysts keeping a close eye on the conflict between the two nuclear-armed countries that can quickly escalate.

What’s Happening

On Wednesday, India and Pakistan both stated that they shot down each other’s fighter jets. Later on, it became known that Pakistan also captured an Indian pilot in response to India launching airstrikes in Pakistan territory for the first time since the India-Pakistan war of 1971.

What came after was both countries ordering more air strikes and ground troops periodically exchanging fire.

Many international flights to India and Pakistan were cancelled and rerouted on Wednesday after Pakistan closed its airspace, including airlines such as Emirates, Air Canada and Qatar Airways.

AFP reported that Pakistan’s Civil Aviation Authority informed all airlines to “suspend their operations in Pakistan until further notice.” Meanwhile, in India, six airports were temporarily closed.

Tensions between India and Pakistan began to first escalate this year following a suicide car bombing carried out by Pakistan-based militants in Indian-controlled Kashmir on February 14, which killed at least 40 members of Indian paramilitary police.

Quick escalation has forced many countries to speak out and urge restraint, with the White House asking “both sides to take immediate steps to de-escalate the situation.”

U.S. Secretary of State Mike Pompeo said he spoke with Indian and Pakistan foreign ministries in both India and Pakistan and “encouraged both to prioritize direct communication and avoid further military activity.”

U.K. Prime Minister Theresa May also called for de-escalation, stating that “U.K. is deeply concerned about rising tensions between India and Pakistan and urgently calls for restraint on both sides to avoid further escalation. We're in regular contact with both countries, urging dialogue and diplomatic solutions to ensure regional stability.”

Market Reaction

Asian stocks edged down on Thursday, following a similar trend on Wednesday. In the meantime, spot gold on was trading at $1,318.30, down 0.06% on the day.

“It’s been incredibly muted. We’ve seen the story coming up before, perhaps not to this scale, and the markets have never really shown a huge reaction to them. I’m very much in the camp that if this becomes an issue, it won’t be a one-day affair,” Pepperston head of research Chris Weston told Kitco News on Wednesday.

Australian stocks were down 0.1%, Japan’s Nikkei edged down 0.5%, South Korea’s KOSPI retreated 0.5%, and MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.1%.

If India and Pakistan’s relationship continues to deteriorate and there is a risk of war, markets will speak up, added Weston.

“The more developed markets will start becoming more sensitive to that and we’ll start seeing a big move down in Treasury yields or a big strength in the yen and volatility in other FX markets, and the S&P index,” he said.

But, so far traders are just watching the conflict develop, while trying to read up on the issue.

“Yesterday, when the news was breaking about planes coming down in Kashmir, we didn’t really see much of a reaction in the S&P. I’ve got my eye on it, but I am not putting any money to work on it until the market shows that it sees it as a bigger issue,” Weston noted. “That market is telling you right now that it doesn’t see a nuclear threat.”

Gold is potentially very sensitive to any further escalation, with prices likely to go higher, according to Kitco’s technical analyst Jim Wyckoff.

“The news has Asian stock and financial markets on edge. Any escalation of this situation would prompt safe-haven demand for gold and silver,” Wyckoff said.

More Statements From India And Pakistan

Pakistan Prime Minister Imran Khan has been calling for dialogue, stating that he hopes that “better sense” prevails and both sides are able to de-escalate.

“History tells us that wars are full of miscalculation. My question is that, given the weapons we have, can we afford miscalculation,” Khan said during a televised state address. “We should sit down and talk.”

The Pakistan government’s official Twitter account also published two videos of a man that it claims to be the captured Indian pilot.

The first showed a bloodied and blindfolded man stating his name and service number. And the second reportedly shows the same pilot cleaned up and drinking tea.

India’s foreign ministry released a statement saying that Pakistan’s treatment of the pilot was a “vulgar display of an injured personnel of the Indian Air Force in violation of all norms of international humanitarian law and the Geneva Convention.”

India also demanded that “no harm comes to the Indian defence personnel in [Pakistan’s] custody.”

Reaction On Social Media

A response to escalating tensions has been overwhelming on social media, with hashtag #SayNoToWar trending on Twitter. Posts from activists and citizens alike showed people pleading for de-escalation and asking for peace.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.