Oil spikes as Iran responds, Trump to speak

Morning Note

Geopolitics will dominate the session on Wednesday as traders grapple with the US-Iran fracas. Geopolitics always means uncertainty – we simply cannot know what will happen next, so look carefully at positions as markets are liable to knee-jerk moves.

Oil and gold spiked and stocks fell as Iran fired 22 surface-to-surface missiles at two US airbases in Iraq, in direct retaliation for the killing of Soleimani. So we know the Iranian response at last – this could actually reduce uncertainty unless we see escalation.

The next move lies with the US. Iran said the attacks were ’concluded’ and said it is not seeking a broader conflict. “We do not seek escalation or war,” Javad Zarif, the Iranian foreign minister tweeted in English. The implication is that they will not carry out further reprisals and wish to draw a line under the situation. Frankly they’ve barely scratched the US with this attack – it appears like nothing but a way to save face. Threats to hit Dubai and Haifi are frankly ridiculous.

However Donald Trump has said previously he would respond to any reprisals with his own. The president plans to address the media on Wednesday morning eastern time.

Following the attacks he tweeted:

“All is well! Missiles launched from Iran at two military bases located in Iraq. Assessment of casualties & damages taking place now. So far, so good! We have the most powerful and well equipped military anywhere in the world, by far! I will be making a statement tomorrow morning.”

The president has a chance to de-escalate – but does he want to? My inclination remains that a broader conflict will be averted, largely because Iran does not want to be lured into a regime-changing conflict before it has the bomb, even if that’s what the US is seeking. But increasingly there is the risk of miscalculation as neither side wants to back down.

Meanwhile, a Ukrainian passenger jet crashed shortly after take-off in Tehran with all 176 souls lost – not sure what this means or whether related. It was a Boeing. The coincidence is too much to ignore – it was surely caught in the crossfire?

Oil surged as the Iran strikes broke but has pared gains. WTI jumped to $65.60 but has since retreated to a little above $63. The May 2019 peak at $66.60 remains intact for the time being. Brent rallied north of $71 but subsequently fallen back to $69. Should this escalate quickly into a broader conflict there is a risk of supply disruption in the region that could send Brent to $80 a barrel. However, we must as ever stress that the global oil market is simply not exposed to shocks like it once was.

Gold surged to new 7-year highs at $1610 before easing back to $1590. Net longs are already stretched – is there any more this can run? As ever keep an eye on US real yields. Against this backdrop of rising geopolitical tension oil and gold are making new highs and higher lows for the time being. Gaps need to be filled quickly or they don’t get filled.

US stock market indices weaker on Tuesday handing back much of Monday’s rally, and we will see the impact of the Iranian reprisals dent European stocks on Wednesday. US futures have dipped but erased most of the initial drop following the strikes. Dow last trading around 28445 having dipped under 28150.

We need this US-Iran stuff to go away to focus again on the data. US services ISM yesterday was v good but Europe is still not swinging. German factory orders were below expectations coming in -6.5% yoy vs expected -4.7%. But the Ifo momentum points to turnaround coming.

In FX, GBPUSD has held the key support around 1.3140 to trade at 1.3150. Brexit comes back on the agenda but the exit is now a done deal. EURUSD is steady at 1.1150 but the failure to surmount 1.12 raises downside risks near-term.