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Iraq may dent but not derail market rally

Jitters about Iraq have unsettled global equity markets but are unlikely to lead to the deeper market correction anticipated for some time, analysts tell CNBC.

Wall Street shares closed broadly lower overnight, with the S&P 500 moving further away from this week's record highs. In Asia, Japan's benchmark Nikkei opened down almost 1 percent on Friday amid escalating violence in Iraq.

Read MoreTough decisions loom for Iraq war critic Obama

"It [Iraq violence] certainly has an outside potential [to hurt markets] but right now you have to view this as just noise," said Robert Pavlik, chief market strategist at investment firm Banyan Partners.

"This situation is just raising overall geopolitical concern. Oil traders will push oil up and we could get to $112 but at that level it doesn't derail anything," he added.

In Iraq this week, Sunni Islamist militants have extended their march south towards the capital Baghdad prompting U.S. President Barack Obama to warn of possible military intervention. Iraqi Kurdish forces meanwhile have taken control of the oil hub of Kirkuk amid the chaos.

Read MoreOil spike fears rise as stability in Iraq unravels

Kurdish soldiers provide security at a checkpoint as Iraqi refugee arrive fleeing from the city of Mosul.
Sebastiano Tomada | Getty Images
Kurdish soldiers provide security at a checkpoint as Iraqi refugee arrive fleeing from the city of Mosul.

Against this backdrop oil prices have soared, with U.S. crude futures on Friday rising to $107.68 per barrel, their highest level since September.

In terms of the broader impact for equity markets, analysts said the general upward trend should hold for now.

"If past performance is anything to go by, we do tend to get a bit of volatility around these geopolitical events but ultimately the same trends reassert themselves," said Stephen Davies, CEO at Javelin Wealth Management.

"Let's not forget that just two days ago, the U.S. market and a number of global markets hit new all-time highs, so having some retracement from those levels is not surprising," he said.

Read MoreAirstrikes needed to stop Iraq violence: Fmr. US Ambassador

Indeed, even amid growing concern about Iraq, European shares on Thursday held near 6-1/2 year highs. The S&P 500 meanwhile is off just 1.3 percent from a record high hit on Monday and is up about 5 percent in terms of its year-to-date performance.

Bob Doll, chief equity strategist at Nuveen Asset Management told CNBC Asia's "Squawk Box" that it's unusual that the U.S. equity market has not yet seen a big correction after a long bull-run.

"The reason we've gone this long is the massive amount of liquidity coming from the central bank and as they [Federal Reserve officials] taper and consider rate normalization there'll be a little less liquidity, so any correction will be a little more normal," he said.

"I'm guessing this is not going to be the stake that goes through the heart and kills the bull market but that this is a temporary pause," Doll added, talking about market reaction to the developments in Iraq.

Asked whether stock markets would end the year higher, Doll said he believed they would but perhaps not with the same pace of gains seen so far this year.

"I have a hard time seeing another 5 percent by the end of the year, I suspect the market will be higher but the pace will be a little more difficult and a bit bumpier," he said.

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