As violence flares across the Middle East and investors wonder what will happen next, the situation resurrects what is becoming a familiar theme: What will it take to shake the capital markets these days?
Geopolitical turmoil is a favorite culprit. If the American economy is improving, balance sheets are growing and stock market bullishness turns more feverish by the day, the reasoning goes that a pullback or correction could come only from abroad.
Yet the rumblings from within Egypt, Libya and elsewhere, as well as escalating debt problems across the European Union, haven't had a major effect on the markets. But chatter is intensifying that should contagion take hold, investors had better be ready.
"The markets are rightly on edge given the fast-moving nature of the situation and the fact that we're in a new world in terms of the ability of geopolitical risk to spread across these countries," said Robert Tipp, fixed income strategist at Prudential Financial in Newark, N.J. "That has to be monitored, obviously."
Indeed, Tuesday shaped up as a volatile day in the markets, with a sharp spike upward in oil and Treasurys, a strong retreat in stocks and a mixed day for metals. The session could be a preview of what's to come if the unrest continues.
A look at what market pros were saying Tuesday about the future of various asset classes:
The US dollar was little changed through the dayon a broad basis while falling against the yen, with the bulk of the flight-to-safety trade heading to Treasurys, though at least one European currency still stands out as a haven amid global turmoil.
Currency trading was heavily mixed elsewhere around the globe, with the Swiss franc rising sharply against the dollar and the yen.
Hedge fund manager Dennis Gartman, author of the widely read Gartman Letter, warned that debt problems in the European Union could yet trigger substantial havoc.
"This is not a pretty picture, and we fear we may be overlooking other concerns that shall loom larger and of even greater consequence in the day, weeks and months ahead," he wrote. "Thus, the Swiss franc has become the currency of the day this morning, for it, like gold, is the safest haven in Europe and it is where money flows during times of crisis."
Oil seems to be the easy play—keep buying until the Middle East settles down—though the metals play is more selective. Gold as a store of value is popular; copper as an economic growth play is not.
The oil situation "is a little more serious this time," because "it's going to spread to the rest of the Middle East," said Brian Gendreau, market strategist at Financial Network.
"We are playing gold and oil on the upside," said Philip Silverman, managing partner at Kingsview Management. "As long as these large fiscal imbalances are not being taken care of in any capacity and the Fed is continuing to print money, the path of least resistance for all commodities is up."
But Tom Petrie, vice chairman at Bank of America Merrill Lynch, cautioned that oil prices reaching $105 a barrel or so could trigger "demand elasticities," or a consumer retrenchment. Investors, then, should be a bit more discriminating about what could be a very lucrative oil play, he said.
"The upstream end of the oil and gas business in relatively secure areas is a great place to be not just for this year but for the next five to 10 years," Petrie said in a CNBC interview (see video below). "We're on the cusp of a real change in the rules of the game that are going to reward upstream investors in more stable parts of the world."
Gold, meanwhile, is likely to keep its upward trajectory as it is boosted both from geopolitical unrest and competitive devaluation that has led to global currency wars.
"As long as we're printing money and as long as they're printing money around the world, I don't see gold going down," said Mike Savage, president of Savage Financial Group in East Stroudsburg, Pa.
One of the three significant investment themes this year—along with the continued climb of stocks and escalating energy prices—has been a march higher in Treasury yields as the inflation story takes root.
Prior to Tuesday's trading, benchmark 10-year notes had climbed about 0.30 percentage points, or 30 basis points, and were expected to keep rising. Instead, the news flow of out Libya sent investors looking for cover and back into Treasurys, slicing about a third of the year's gain in yields.
That trend could continue if investors worry about spreading inflation from overseas that would result in tightening from global central banks, particularly in emerging markets.
"The boomerang here is that risk markets—stocks and others—are becoming very sensitive to tightening policy in countries like China, since they raise concerns over the difficulty of engineering a soft landing," Prudential's Tipp said.
Should global banks tighten and push up rates, he said, that could trigger increased inflation fears abroad and send fixed-income investors into US debt.
Equities around the world recoiled from the Libya shock, with US stocks off more than 1 percent in afternoon trading. But for some, the situation smelled a lot like what happened a few weeks ago during the upheaval in Egypt.
Sam Stovall, chief equity strategist at Standard & Poor's, sent a note to clients titled, "A Revolutionary Idea: Profit from Panic," and suggested that investors ought to keep buying stocks, especially if the market enters a substantial pullback or correction.
"Even though this market could still ultimately pay the price for dismissing the seriousness of the intensifying tensions in the Middle East, we continue to believe the equity markets will endure a long-awaited correction in prices, but not slip into a new bear market," Stovall wrote.
Similarly, Michael Cohn at Global Arena Investment Management said he doesn't see the Middle East problems "as major" and observed, "This market just doesn't want to go down. It's got to find a reason to go down and these little flare-ups in the Middle East are not really something that are going to change strategy."