It took the assassination of a man who everyone else knew better than to assassinate to push the S&P 500 to a weekly loss.
Thanks to Friday’s slide (the worst in a month), US equities slipped 0.2% on the week after an MQ-9 Reaper drone incinerated a convoy carrying Qassem Soleimani, Iran’s most revered general and the most feared intelligence operative in the Mideast.
Were it not for the Trump administration’s brazen, extraterritorial execution, the S&P would have almost certainly logged a 12th weekly gain in 13. Instead, a five-week win streak is just as dead as the general, although unlike Qassem, stocks will have a chance to rebound next week.
Note the simple chart in the bottom pane. The long-bond ETF had its second-best day since August, which, you’ll recall, was the best month for US government debt since 2008.
Let that sink in – there’s a lot of chatter on Friday evening about a “muted” market reaction. To be sure, you could argue that stocks “should” have fallen more given the gravity of what unfolded in Baghdad, but 10-year yields retreated ~9bps on the session. That’s a big move. Prior to December 3, the last time TLT rose this much in a single session, Donald Trump had just threatened to force US businesses to pack up and leave China (on August 23).
Crude obviously surged. Brent ended up around 3.6%. Oil demonstrated a remarkable propensity to ignore geopolitical tension in 2019, and even stabilized relatively quickly after the drone attacks that crippled 50% of Saudi oil production in September. That predisposition for “playing dumb” (so to speak) will be put to yet another test less than four months after the attacks on Abqaiq which, by the way, Soleimani almost surely planned.
Importantly, the 2s10s flattened by ~4bp on Friday. Recall that headed into the new year, the curve had steepened beyond 34bps as reflation optimism gripped markets. Now, we’ve retraced nearly 10bps to 25. It didn’t help that ISM manufacturing printed the lowest since 2009, disappointing those hoping for a rebound in line with the far more ebullient IHS Markit factory gauge.
The Russell 2000 outperformed the large-cap benchmarks on Friday, but still closed red for the fifth session in six. To reiterate points made here on Thursday evening, that is absolutely not the kind of streak those riding the reflation narrative had in mind headed into 2020.
Speaking of the reflation trade, the high beta ETF stumbled twice as hard as the S&P to close the week, in another sign that Q4’s favorable outlook on growth and economic stability is already faltering in the new year.
The president eventually delivered some perfunctory remarks justifying the strike on Soleimani.
“We caught him in the act”, a nervous-looking Trump said, his eyes darting to the corners of the room, as though Qassem might be lurking in the curtains. “And, we terminated him”, the president continued.
There are pressing questions as to the veracity of the administration’s account. It’s not that anyone doubts whether Soleimani was planning attacks on US personnel. Rather, the question is whether there was any reason – any reason at all – for the Pentagon to believe that something out of the ordinary was in the offing, or that there was, as Trump claims, some manner of truly dramatic escalation in the cards.
Nobody is mincing any words when it comes to the gravity of this situation. These types of soundbites will be flooding in for days, but, as we put it in the minutes after the general was killed, it is impossible to overstate the significance of his death.
“The puppet master is dead; the strings have been cut”, Michael Knights, a Gulf expert at the Washington Institute told CNBC, before elaborating as follows:
Qassem Soleimani is a unique figure. We don’t have anyone like him in the U.S., and because he was experienced, capable and had the complete trust of the supreme leader of Iran, they over-concentrated an awful lot of their capability and their prestige in one man.
“[This] far eclipses the deaths of bin Laden or Baghdadi in terms of strategic significance and implications”, Charles Lister, a resident fellow at the Middle East Institute said Friday. “There really is no underestimating the geopolitical ramifications of this”.
No, there is not. And it seemed as though Trump himself may have been a bit taken aback by the situation – at least initially.
“We should all be bracing for a ferocious response”, Helima Croft, chief commodities strategist at RBC, who’s often quoted in times like these said. “The stage is set for a retaliatory spiral that could keep markets on edge well into 2020”.
Mohammed El-Erian weighed in too. “The killing of Qassem Soleimani is a significant escalation in what has been a protracted period of low-intensity tensions and asymmetric warfare”, he wrote, for Bloomberg. “As tempted as long-term investors will be to again buy the dip, primarily using index and passive products – and they will – they should do so as part of an increasingly more selective overall strategy that maintains a claim on the short-term upside while protecting more against mounting uncertainties”.
On Friday evening, Press TV said six people were killed by new airstrikes on a PMU convoy in Iraq.
Read our full coverage of the Soleimani assassination:
US Kills Qassem Soleimani In Historic Assassination
World Reacts To Assassination Of Qassem Soleimani: ‘This Is The Worst-Case Scenario’
Mike Pompeo’s Credibility Deficit Makes PR Effort Around Soleimani Assassination Hopeless
Blood for oil. Not going to end well.
With present policy, was Iran winning or losing? If they were winning, why change policy. Stay calm, continue to win. Soleimani will be replaced and the longer war goes on. They aren’t looking for a tit-for-tat escalation; or at least they shouldn’t. That won’t be a win. The only win for Iran in this came when Trump said yes.
Trump has now stepped in the sh*t. There is a reason that different tribes have been fighting over blood feuds for over a thousand of years in the Middle East. This idiot just pushed the crazy button so look out if you are anywhere near Iran’s sphere of influence. This is bad very, very bad.
H-Man, if we assume POTUS will manipulate the arena to his benefit (ala Ukraine), is it reasonable to assume this strike was done on a grander stage for the benefit of POTUS? And before you decry that assumption, remember the immediate effect has sent the word “impeachment” to the back of the bus. The media is consumed by Iran. Wars are good for the U.S. economy in the short term, military spending skyrockets, resulting in greater employment, with increases in technology. Long term effects, not so good. No credible evidence has been presented for the strike, other than a generalization about danger to Americans which, unfortunately, has a strong resemblance to the WMD monikor for the invasion of Iraq. While the stock market may suffer initially, due to the gains of the past 10 years including the out sized gains of 2019, there is powder to burn. Then toss in an election in a few months and is it unreasonable to think POTUS is manipulating this situation as he has done with other events repeatedly during his presidency which are to numerous to mention.
The sad fact of the matter is that I write this post wondering if POTUS is acting for our protection or simply advancing his agenda. Those doubts are based on his statements made over the past three years which, to put it mildly, give him little if any credibility. I am a realist and not a conspiracy freak. I find myself asking the question whenever POTUS takes action, is there another reason?
And then there is the great conundrum. If Pompeo was killed by the Iranians for plotting to kill Iranian generals, how do you think we respond?
I am guessing it is a combo of ego/drunk on power and the instinct of acting like a mafia don. Say what you will but trump has now killed someone. Yes, someone of pure evil but a human and indirrectly others will now be killed. Either way I am not sure I want some like trump with this power. Hopefully others come around and vote him out in Nov.
Like the guy says in Farmers insurance company commercial says “We know a thing or two because we’ve seen a thing or two.”
People naturally fall in line during times of war. If this escalates, expect rabid nationalism, worship of militarism, forgiveness of authoritarian behavior, etc. The narrative may shift quickly in the next few days.
Be prepared to (a) keep your mouth shut (b) be ordered to love America or leave it.
Honestly, I thought SP500 would be down 3% today. Let’s see China trade deal has passed, overbought, new year means taxes pd a ways away, limited upside (in my eyes), weak ISM Mfg, Fed prob on hold unless earnings deteriorate (ie slower growth) and “the game changer”. Oh, and new emails showing the deal with Ukraine.
Amazing how people are either frozen, naive, ignorant, extremely risk tolerant, or maybe they are right and all will turn out well.
I know most battle hardened guys like me have left the biz (voluntarily or not) but markets in the past would not have reacted like this.
Even after the exo existential threat of 08 passed it took years to move closer to “normal” and we sit here beyond “normal” in my eyes.
No wonder why us former HF guys are at home, playing golf, and trading our own capital.
It is a different world.
I just can’t get myself to invest the way it is now required. I hear echoes of Chuck Prince……………..
The Bloomberg editorials are going all in that Iran will be too frightened to do anything. I guess they are not that bright after all.