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: