Oil and gold spike, risk offered on US-Iran tensions
January has started 2020 with a flurry of risk-off moves as
investors seek shelter from the risks of Gulf War III. The US air strike on
Iran’s top general is the major focus for the markets, particularly energy
markets. The killing has lit a fire under oil and gold as US-Iran tensions
necessitate a higher geopolitical risk premium.
Risk is offered – European equity market sentiment is
weaker on Monday morning and the major indices are lower. US markets closed
weaker on Friday. Even in the event of a limited
conflict in the region, I would question just
how long this will persist when it entails leaning against the Fed, which looks
more than ever like its happy to cut to the bone to let the economy run hot and
drive inflation to 2%.
WTI spiked north of $64 but has failed to make
a sustained push beyond the May 2019 highs. For this to really make a
difference we should be looking for a rally above the Apr 19 highs at $66.60.
If that does not get taken out then
we may consider the gap to be open to filling. Brent has topped $70 for the
first time in three months but again we are looking to the May 19 peaks above
$73 to signal a step-change. Fundamentally oil
markets are just not as exposed to oil price shocks as they were in days gone
by. US shale and a host of production sources coming on stream mean the threat
to global supplies from a Middle East conflict is, though significant, not
We have seen similar moves as those seen in the wake of the
Iranian attack on Saudi Arabian facilities in September. That time the gap was
filled relatively swiftly as there was no retaliation by Riyadh – there was no
escalation. We are in a different territory here and a new order of magnitude,
but the rules are the same.
The big uncertainties right now for crude centre on the
Iranian response to the killing and on that front we
should expect some kind of a response. Will Tehran target US bases? It could
focus more on shipping in the Strait of Hormuz, but we have already seen
attacks on a US base in Kenya killing three and rockets fired into the Green
Zone in Baghdad. Iran does not need to use conventional military forces to
respond and indeed so far it has not delivered a conventional military response
despite all the chest thumping. It does not want to give the US further excuses
to bomb it to the ground with an overt reply. Trump is no Obama – enemies
believe he will strike. The White House has said it has 52 Iranian targets it
will hit if Iran retaliates. European powers are calling for restraint, but the
war is already raging. Whether it escalates into large-scale attacks over the
coming days and weeks, and grows into a full-blown US-Iran conflict, is very
hard to say. But the risk premium genie is out the bottle again.
Tehran has however all but pulled out of the 2015 nuclear
agreement, saying it will no longer limit its centrifuges for enriching
uranium. This unleashes the prospect of Iran acquiring nuclear capability in
the near future – given the US is already exerting ‘maximum pressure’ this risks pre-emptive actions on the part of the US a la Gulf
Wars 1+2. Fundamentally there may be a bigger risk long term by Iran holding
back from responding today and focussing on getting a nuclear weapon. My sense
– and it is only my sense – is that if Iran responds aggressively now the US
could set its nuclear programme back years with targeted strikes.
Gold is on a tear as a result of the heightened
geopolitical risk and depressed US yields. Prices for gold jumped to the
highest since 2013, rallying close to $1600 at $1588. We need to look for a
break north of that round number and then to $1620, the March 2013 peak.
Data since the Christmas break has not been overly
constructive – the US ISM manufacturing PMI fell for a 5th straight
month, slipping to 47.2% in Dec from 48.1% in Nov and marking its worst reading
sine Jun 2009. The effects of the trade war are
biting – hopes are pinned on the US and China agreeing to the phase one deal
this month or we are in for a rollercoaster.
Elsewhere, GBPUSD has settled above 1.30 having been
sold off quite heavily over the first two trading days of the year. EURUSD has
recovered the 1.1160 level. USDJPY has recovered 108 having taken a seven
handle on haven bid. A lot of pressure on that pair as JPY finds bid but it
could be overdone.
Brexit withdrawal bill
vote – a majority of 80 makes this a formality.
Fed – Richard Clarida to
speak. Minutes from the last FOMC meeting released on Friday show doves have
won the day – worries about not hitting the 2% inflation target are prominent.
Loretta Mester, a noted hawk, says she is happy to let inflation run above 2%
and said accommodation is necessary. The hawks have turned.
Payrolls – Nonfarm
payrolls could well show a softer Dec but
seasonal numbers will make it hard to read. Fed is not doing anything but