3chartM

Iran Risk Off Rush, What's Next

Equities 5 minutes to read

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.

Quarterly Outlook

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992