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”.
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.