Ten opinions on what US/Iran escalation means for the markets

Singapore/London — The tone in global financial markets has turned cautious after a US airstrike killed a top Iranian commander, fueling concern over an escalation in tensions.

US stock futures dropped and Asian shares reversed gains, while oil spiked along with the yen and gold.

Qassem Soleimani, a feared Iranian general who, through proxy militias, extended his country’s power across the Middle East, was killed at the direction of US President Donald Trump. The risk-off move deepened after Iran’s Supreme Leader Ayatollah Ali Khamenei, said “severe retaliation” awaited Soleimani’s killers.

The shock news comes after most asset classes have had a stellar 2019, with US equities capping one of the best years of the past decade. Here are 10 analysts and money managers on what it means for the market outlook.

1. Société Générale 
Kit Juckes, chief forex strategist in London

“Gold’s a winner as tension increases, and oil prices are higher too. Bond yields are lower; the equity rally which was underway in the US has stalled but not gone dramatically in reverse; and in the forex market, safe havens and oil-sensitive currencies benefit — but it’s the yen which is the clear winner.

“The key level to watch is probably €/¥120. That probably holds unless there is further escalation.

“Given the scope for tension to persist in the Strait of Hormuz, a protracted period of higher oil prices has to be a risk.”

2. Crédit Agricole 
Valentin Marinov, head of G-10 currency research in London, who calls the timing of the escalation “unfortunate.”

It could “dash market hopes for a rebound of the global economy that is still to emerge from under the cloud of the US-China trade war. Risk sentiment should also remain fragile because central banks may be slow to respond or simply no longer have the arsenal to respond in an adequate way.”

He calls the yen and Swiss franc “attractive”, while saying the conflict could weigh on “risk-correlated, oil-importing currencies like the Korean won”.

3. ING Groep 
Antoine Bouvet, senior rates strategist in London

“Recent episodes of US/Iran tensions have not resulted in material escalation, but even in a fairly benign outcome to this crisis, the bid in US treasuries and bunds should last at least into next week.”

4. Colombo Wealth
Alberto Tocchio, chief investment officer in Lugano, Switzerland

“The ‘severe retaliation’ aspect is possibly what is scaring the markets as it could mean that there will be a counter-attack against American diplomats. Markets could use this excuse to take some profits as sentiment and positioning are possibly too high. We would then use the possible weakness to increase our equity exposure.”

5. Saxo Capital Markets 
Kay Van-Petersen, global macro-strategist in Singapore

“We are moving potentially from proxy (Iran) versus proxy (Saudis and US) to potentially direct Iran-backed forces versus US forces.”

However, “net-net, I struggle to see what Iran can really do. “People are still not back at their desks fully until next week to mid-January, so illiquidity could give us some overreaction to the downside. Still, let’s see how the next 24 to 48 hours play out. Remember, it’s the weekend already in the Middle East.”

The gain in oil “honestly feels a touch overdone”, but this is positive for US defence spending and even French defence stocks could get a boost later, he noted.

“So much for Trump calling troops home.”

6. Covenant Capital 
Edward Lim, money manager in Singapore

“This attack merely highlights the geopolitical risk of the oil markets, and the market undergoing a possible oil shortage in the first to second quarters of 2020.

“We didn’t do anything on the news as we have already bought some oil stocks such as China National Offshore Oil Corporation and Total when oil was trading close to $60s at the end of 2019.”

7. UOB Kay Hian (Hong Kong)
Steven Leung, executive director in Hong Kong

“Investors are worried that the situation in Iran will worsen, since there could be some retaliation after the US attack. People will want to cut risk ahead of the weekend. Stocks have rallied a lot in the past month or so, so any bad news flow is a reason to take profit.”

8. Mizuho Bank 
Ken Cheung, chief Asian forex strategist in Hong Kong

“The reversal of risk-on sentiment will keep Asian forex under pressure. The US dollar index also appeared to find a footing. These factors will probably prompt profit-taking flow on emerging-market Asian forex. The magnitude could be amplified by thin liquidity during the New Year holiday.”

9. TD Securities
Mitul Kotecha, senior emerging-market strategist in Singapore

“Risk appetite has worsened as reflected in the weakness in high-beta currencies in the region in particular. Much now depends on whether there is any retaliation. In the near term, losses in risk assets are likely to be contained.”

10. Crédit Agricole

David Forrester, a forex strategist in Hong Kong, who predicts the yen could rise to ¥106 to the dollar by the end of the first quarter.

“The market is pricing in risk of a potential Iranian response to the US air strikes, which is pushing up gold and oil prices as well as the yen.

“There has been a lot of good news priced into the market in terms of the US-China trade deal and US economic growth. US ISM manufacturing data out later today will be critical in determining whether dollar-yen can break below its two-month trading range.”

With Jeanny Yu, Subhadip Sircar, Hooyeon Kim, Cindy Wang, James Hirai, Anooja Debnath and Ruth Carson

Bloomberg