A New Year .... and a New Crisis

ref :- "Ten Strategists on What U.S. - Iran Escalation Means for Markets" , Bloomberg Markets

If ever anyone was in any doubt about just how fundamentally global geopolitics can shape market movements, this morning has seen the sharpest of reminders. In a move rubber-stamped by President Trump, the hard-line (and much feared) Iranian general Qassem Soleimani was targeted and killed by a US drone in Baghdad. Whatever one's position, this is a distinctly worrying development and a very unwelcome way to start the year. We cannot know at this early stage where this will lead, but Ayatollah Ali Khamenei's promise of "severe retaliation" suggests that this may not be one of those incidents that blow over in a brief if powerful storm of fiery rhetoric.

It seems invidious sometimes to look at events that could conceivably have some very dark ramifications for our world purely through the prism of how they might affect markets .... but then someone's got to do it, we suppose. It could be argued that the action this morning has been exaggerated in places by the lack of liquidity over the extended New Year holiday (oil markets, for example) . Elsewhere, movements have been relatively muted, perhaps because traders are as yet unsure how big a problem this may or may not turn out to be (Swiss franc).

Whatever the case, everyone should be at least considering how they might need to adjust their plans for the year ahead if this thing blows up into something big. For example, could the balloon of the optimism engendered by the imminent signing of a preliminary US - China trade deal -- that has seen US stock markets finish 2019 at or near record highs -- be punctured by the increased threat of a Middle East conflagration ? If such a development severely interrupted oil supplies from the region, what effect would that have on global growth and trade, especially if the Phase 1 trade deal turns out to be more show than substance (as it well might) ?.

We were going to look at a piece in the FT today by Katie Martin ( "Time for investors to rethink bonds" , Opinion), but events like those today can make the timing of such articles seem a little unfortunate even if one felt they made pretty good sense. With global bond yields bouncing sharply from lows set in early September (with a corresponding fall in bond prices), it's perfectly legitimate to consider calling the 30-year bond rally definitely over and adjust one's portfolio accordingly. Particularly so when confidence in avoiding recession is growing and calls for stimulus are switching from the monetary method (which eases rates) to the fiscal (which would entail more government spending and borrowing, pushing bond yields higher and prices lower).

The logic behind such an argument remains absolutely intact, but the rush into safe assets this morning sparked by the Baghdad incident has seen bond yields fall by up to 10 basis points (and prices rise). As we say, unfortunate timing and one might have to wait to see how this thing pans out before putting 2020's masterplan into action. (Ms. Martin's piece is still well worth a look, by the way).

Anyway, Bloomberg have got ten analysts to give their knee-jerk reaction on how markets are / will be affected by today's news. Such prognostications given so early when no one can know how badly this thing might escalate always come with huge qualifications, but frankly, there are few surprises ..... just think of the normal beneficiaries of a flight to safety, and of those markets that would suffer from an interruption to global growth and trade . A summary would include :

GOLD : the classic safe haven, had a look above $1,550 per oz. this morning, challenging the 6 1/2 year high set in September.

EQUITIES : Unsurprisingly, US equity futures are lower on the implications for trade. We shall see whether this development will finally put a dampener on the seemingly irrepressible exuberance of US stocks.

SOVEREIGN BONDS : As we've heard, yields down / prices up in a flight-to-quality

OIL : Brent Oil futures were up 4% this morning . Given the effect that a major flare-up in the region would have on supply, such a reaction is understandable but analysts warn that one should take care : oil marlets are famously over-reactive and the proportion of world supply from outside the region is much greater than it once was.

CURRENCIES : the US dollar is in fact something of a safe haven itself, which is why the Dollar Index is higher this morning .... but the US unit is lower against everyone's favourite safe-haven currency, the Japanese Yen. Crédit Agricole say the Yen could rise initially to 106 versus the dollar (USD/JPY last at 108.12). Societe Generale say the key cross to watch might be EUR / JPY. A break down through 120.00 would be significant (last at 120.40). Slightly strangely, the other classic safe-haven currency : the Swiss Franc has yet to react. Expect a risk-off atmosphere and threats to oil supplies to hurt oil-importing currencies (particularly in Asia) like the Korean Won.

Who knows ? Perhaps in a week's time, as so often, we'll be wondering what all the fuss was about. Somehow though, on this occasion, it doesn't really feel that way .....

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