US equity futures initially plunged and gold surged after Iran launched the first wave of retaliatory counterstrikes against nearby American forces following the assassination of the country’s top commander.
The IRGC fired 15 missiles at two bases in Iraq housing US troops. There may eventually be more where that came from, although some have suggested this is really nothing more than a “token” response from Tehran.
The Pentagon released a statement, noting that the DoD is conducting a damage assessment and is prepared to respond to protect US interests.
Gold – which was already up handily in the first week of 2020 after surging more than 18% in 2019 – rose above $1,600 for the first time since 2013.
This will test the mettle of those who claim risk assets are immune to geopolitical turmoil – the missiles were fired from inside Iran, by the IRGC, which released an official statement.
In other words, these attacks on US personnel were not by proxy. This was Iran proper striking US interests. Stocks were not pleased. This was the knee-jerk:
Subsequently, futures trimmed losses after the White House said that contrary to initial reports, Trump had no plans to address the nation on Tuesday night. Fox News said there were no US casualties.
Markets were predisposed to an “optimistic view that the tensions in the Middle East won’t last too long”, but those positions are getting unwound, Tokyo-based Hironori Sannami, an EM FX trader told Bloomberg. “It’s hard to have a clear view on whether this sell-off will last long from here, and we need to see how the US would react first”, he added, stating the obvious.
As a reminder, the dreaded “gamma flip” level for SPX was ~3,888 as of Tuesday morning. Futures briefly dipped below those levels, before the tide turned. There’s still a ways to go on the downside before CTA de-leveraging is in play – or at least on Nomura’s model (3,147 SPX is where you may begin to see systematic de-risking from trend followers).
The yen and crude saw predictable reactions, with the safe-haven bid boosting the Japanese currency and the geopolitical risk premium getting panic-priced back into oil. The initial moves shown below were faded, but it gives you an idea of how how things could develop if the situation begins to spiral.
“It’s not pretty today”, Stephen Innes, chief Asia market strategist at AxiTrader remarked. ING weighed in quickly, with the following color in an e-mail:
For the oil market, while this is clearly not oil infrastructure, it does little to help ease tensions and worries over oil supply. The obvious concern for markets, is where does this all end? The worry is that we could see more from Iran, provoking US retaliation – a scenario that cannot be ruled out given the warnings from President Trump. If so, the key question is whether any of the 52 sites that President Trump previously identified as targets include Iranian energy facilities. While Iranian oil output has fallen by around 1.7MMbbls/d since early 2018, demonstrating the effectiveness of US sanctions, any potential attack on Iranian oil facilities still leaves up to 2MMbbls/d of oil supply at risk.
Ultra bond futures tripped the circuit breaker, hitting the 3-point daily limit. They’ll resume with a 6-point limit in place. 30-year cash yields plunged as much as 9bps to 2.21%.
Yields fell 10bps across the curve, on huge volume – futures volumes were running around 7x the 30-day average for the time of day, Bloomberg noted amid the chaos. Treasurys would later pare gains, as the shock wore off.
Asia CDS initially blew out. The Markit iTraxx Asia index widened as much as 4bps, the biggest increase since the aftermath of the September attacks on Saudi oil infrastructure. Markit iTraxx Japan and Australia logged similar moves.
For now, it seems as though the worst-case scenario was averted. Trump eventually tweeted that “all is well”. That depends on your definition of “well”, but World War III will not start on Wednesday. Javad Zarif called the strikes “proportionate” and reiterated that Iran is “not seeking war”.
No need to panic, apparently…
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.
— Donald J. Trump (@realDonaldTrump) January 8, 2020