Although Asian shares retreated in the face of escalating hostilities between the US and Iran, markets generally recovered from the initial shock of the IRGC’s strikes against American troops in Iraq.
US equity futures, for example, ended up turning positive after falling as much as 1.7% in the knee-jerk reaction to the rocket attacks.
Crude trimmed gains as well, as markets once again faded the pricing-in of a geopolitical risk premium that hasn’t had much in the way of staying power over the course of the protracted clash between the Trump administration and the theocracy in Tehran.
Gold, which surged above $1,600 for the first time since 2013 as rockets rained down on two bases hosting US troops, came off the highs, and Treasurys pared gains after ultra futures tripped the circuit breaker during the initial tumult.
“An Iranian rocket attack on a US base in Iraq triggered a short period of market volatility overnight but FX and bond moves have largely been reversed and the consensus view is still that major escalation is unlikely”, SocGen’s Kit Juckes wrote, in a short note called “things that go bump in the night”.
Read more: Markets Upended By Iran Strikes. Trump Says ‘All Is Well’
It’s still too early to fade equity strength, Barclays’ Emmanuel Cau said in a note, adding that any shallow correction will probably be contained given light positioning from long-only investors and dovish central banks.
Notably, the yen erased the entirety of the risk-off move, while gold, true to form of late, wasn’t as quick to lose its figurative and literal luster.
“USD/JPY and USD/Gold don’t often de-couple and if gold is principally an anti-currency that wins in a low rate, uncertain world, then it is the yen’s twin, albeit currently a lot shinier”, Juckes went on to say Wednesday, adding that he’s “doggedly sticking to yen longs at the start of the year though last night’s moves show how quick the market overall is to ditch them”.
Japan’s Topix fell sharply on the day, as did most regional benchmarks in Asia.
One thing’s for sure: it’s not a good idea to tune completely out during the US evening. “The early message for S&P 500 futures in 2020 is: Be careful about bullishness at the close of the US trading day”, Bloomberg’s Mark Cranfield wrote Wednesday.
“Three of the past four opening sessions in Asia for E-Minis have seen the contract decline with January 3 and 8 the most painful because of the US-Iran conflict”, he added.
Holy fuck that was faded fast. Although things are looking good this morning, I’d say it’s hardly the end.
Iran may have chosen a face saving attack for now, i.e. one that shows them reacting by clearly using their own assets to attack, not a proxy army. This is what Ali Khamenei had demanded of his military. It is like they checked a PR box by doing the demanded revenge attack. But they did not really do any big harm, not enough to push the US further toward war.
I suspect that Iran will take their time to have a more damaging attack and make sure that it has deniability attached to it. It may be cyber in nature and will probably try and hurt Trump directly. Perhaps a leak of his tax returns or something with his hotels? Who knows; we live in interesting times. Paradoxically I think most Americans around the world can relax, as I suspect if they intend to kill an American somewhere, it has to be someone pretty high up to be commensurate.
I was reading the leaks from Iran’s intelligence service from earlier this fall and there was some pretty strong criticism of Soleimani internally. Some accused him of trying to prepare for his own political career by building a cult of personality and thought he was pissing off a lot of people in Iraq by flaunting how directly he was controlling events there. As this led directly to massive protests in Shia Iraq over the last few months against Iran as well as in Lebanon, there is some real good analysis there. They make a point of saying to make sure that Soleimani does not get to read this criticism so there is clearly factions fighting in the Iranian secret services. Wouldn’t it be ironic to eventually find out that someone in the Iran intelligence agency dropped a dime on him by letting the US know that he would be landing in Baghdad when he did.