Iran Retaliates, Oil and Gold Surge

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What do we know so far?

Iran has launched multiple retaliatory missile strikes against coalition bases within Iraq. Quite a few missiles it would appear. The overtness of the attack has surprised me, as it is almost inviting the US to launch a “shock and awe” retaliation. There is no word on casualties or damage. In military terms, “its a fluid situation.”

What can we expect?

A US response of some kind is the most obvious. The scale of it with the forces that are in place in the theatre remains to be seen.

Oil and precious metals have leapt higher and will continue to do so. Expect equities to take a hit, especially in imported energy-dependent Asia.

Less obvious is air travel. East-West airline traffic could be severely disrupted in an escalation of hostilities. Several crucial air corridos transit Iran and its neighbours, with the closure of Iranian airspace potentially disrupting routing. Airline stocks will be out of favour today because of oil, but that won’t be the whole story.

The potential closure of the Straits of Hormuz – Iran has plenty of land-based anti-ship missiles – will severely disrupt oil supplies from the Middle East.

We may also see next week’s signing of the interim US-China trade agreement in Washington DC delayed.

Equities

Japans Nikkei is 2.50% lower, and the Straits Times is 1.25% lower. That tells the story, and we expect Asia stock markets to be pummelled today.

Currencies

Haven currencies such as Swiss Franc, and to a lesser extent, the Japanese Yen, will outperform. Overall though the US Dollar should be the day’s winner, especially as the Iran attack will likely cause a stampede out of regional and emerging market currencies.

Oil

Both Brent crude and WTI are 3.0% higher at $70.90 and $64.85 a barrel respectively. I am surprised it is only three per cent thus far. Clarity over damage and casualties from the Iranian missile bombardment will clarify the likely scale of the US response. For all the reasons explained above, though, any complacency within the oil market should now be consigned to history. The chances of a significant top-side squeeze in oil prices have risen dramatically.

Gold

Gold has risen two per cent to $1605.00 an ounce while Silver has also jumped to $18.6500 an ounce. Technicals become meaningless on days like these, needless to say, gold and silver’s safe-haven role will take centre-stage in Asia. Expect any dips in either metal to find a queue of eager buyers.

Happy New Year….