Iran Risk Off Rush, What's Next

Equities 5 minutes to read

Eleanor Creagh

Australian Market Strategist

Summary:  In a textbook risk-off rush, US stock index futures and Asian equities tumbled after Iran launched an attack on Iraqi air bases where US troops are stationed in Iraq. Treasuries, the yen and gold surged, along with oil prices, with gold rising above $1,600/oz for the first time since 2013 as tensions ratcheted higher in the Middle East.


After fleeing to haven assets, traders will now be in ‘wait and see’ mode in an attempt to gauge the scale and severity of the Iranian counterattack in order to assess the range of likely countermeasures from the US and whether there will be a further escalation in tensions.

Key to the US response will be casualty numbers. As yet, there are no official reports but Fox news are reporting no American casualties after the missile strikes as yet, although some Iraqis have been injured. In a conflicting report, Iran's military says it has killed 30 US soldiers in Iraq tonight. The key to the next move in markets will stem from the damage assessment and count of US casualties to determine President Trumps response function. Any US casualties will undoubtedly prompt an escalation from the US, so it is critical to see how this story develops. The Islamic Revolutionary Guard Corps (IRGC) stated in its Telegram channel that, in the event Iranian soil is bombed, it will target the cities of Dubai, United Arab Emirates, and Haifa, Israel, in the third wave of operations. So it could get very ugly, very quickly if a damaging cycle of escalation ensues, in which case we can expect haven bids to rocket. USDJPY and USDCHF will certainly extend losses along with gold and oil moving higher if the situation intensifies in such a serious manner.

However, if this attack proves a pin pointed strike with no US casualties and represents the full extent of the promised Iranian retaliation, then de-escalation will be the course of action. There are reports that warnings of inbound missiles were issued in time for troops to seek shelter in bunkers and move out of strike points. The US military would have been anticipating an attack in order to avenge the killing of Qassem Soleimani and if there are no US casualties, we can expect a far more measured and calm response from the US, with Iran’s actions seen as a necessary retaliatory escalation that simultaneously restores their credibility and de-escalates. US media in Tehran corroborates this sentiment saying, if there is no retaliation from the US then Iran will stop attacking.

Clearly at present, a myriad of uncertainties remain around a potential US counter strike and any further reprisals which will subdue risk appetite and could see volatility whipsaw markets again. Heightened geopolitical risk is also the exact opposite of recent market drivers into year-end, which were built on liquidity and a narrative of receding geopolitical risks, so there will be exaggerated headline risk at present. With valuations stretched and markets already expensive based on a lot of inbuilt positive assumptions, it doesn’t take much to tip the scales. And more broadly, the actions contribute a timely reminder to market participants of the persistent event risk that has weighed on global growth over the past 12-18 months and continues to support bond markets.

The lack of predictability from the tweeter in chief lends to fatter tail risks, so the range of outcomes are clearly quite frightening which will keep dip buyers hesitant, although those more sanguine may be ready to dive in and fade risk-off moves on reports of zero US casualties. President Trump’s decision not to address the US tonight and restraint on twitter is lending a glimmer of hope to traders that US responses will be more calculated and restrained.

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.