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Risk-Off After US Airstrike Ramps Up Middle East Tensions

Crude oil prices jumped on speculation that further military action is likely, raising the possibility that supply will be affected.
James Hyerczyk
USA and Iran
USA and Iran

The major global equity markets are trading sharply lower on Friday as investors reacted to an escalation in Middle East tensions. Consequently, investors are moving money into safe-haven assets for protection.  The early price action indicates that today will be a “Risk-Off” day.

The catalyst behind the moves is the news that an Iranian military commander was killed in a Baghdad airstrike. The Pentagon later confirmed that he was killed by a U.S. drone strike. Crude oil prices jumped on speculation that further military action is likely, raising the possibility that supply will be affected.

Shares in Asia were mostly lower with stocks in Australia and South Korea bucking the trend.

In the U.S., pre-market futures were trading lower. At 04:24 GMT, Dow Jones Industrial Average futures were 180 lower, implying an opening drop of 181.00 for the index at Friday’s cash market opening. S&P 500 and NASDAQ 100 futures also pointed to opening losses for the two major indexes on Friday’s cash market opening.

February West Texas Intermediate crude oil is trading $62.92, up $1.74 or +2.83% and March Brent crude oil is at $68.20, up $1.95 or +2.94%. Traders are worried that retaliation from Iran will center on crude oil supply.

Treasury yields are down as investors sought protection in the safe-haven U.S. government debt markets. The drop in interest rates made gold a more attractive investment.

Gold hit its highest level since September 25 and is in a position to challenge the September 24 main top at $1549.90. The high in 2019 was $1571.70, reached on September 4.

The drop in yields also tightened the spread between U.S. Government bonds and Japanese Government bonds, making the Japanese Yen a desirable asset. The drop in stocks also triggered the carry trade, where investors sold dollars and bought Yen.

The higher-risk Australian and New Zealand Dollars are also under pressure. The British Pound and the Euro are flat and safe-haven buying is supporting the Swiss Franc.

Market Action Suggests Investors Anticipating Retaliation

The death of General Qassim Soleimani, the head of Iran’s elite Quds Force, Abu al-Muhandis, the deputy commander of Iran-backed militias known as the Popular Mobilization Forces, or PMF are a potential turning point in the Middle East and are expected to draw severe retaliation from Iran and the forces it backs in the Middle East against Israel and American interests.

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