Return to geopolitics
The decision from the US to wage war on Iran has, of course, taken its toll on markets. The obvious move in such an environment from investors is to de-risk. That decision carries the tell-tale impacts in FX of boosting the Dollar’s value, putting EM under pressure, and causing a flood of demand into typical safehaven assets. Initially, we also see impacts in key-commodities – Gold, for example, has risen in price significantly attracting that same safehaven bid that has benefitted the Swiss Franc this week and, to a lesser extent, the Japanese Yen. Oil, as a key regional commodity, rallied upon concerns of supply constraints that may be caused by the conflict.
Another symptom that appears to have pervaded across asset classes is volatility. Conflict provides a great deal of uncertainty. The expected duration of the current conflict are already being bandied around by the White House but no one truly knows how long it will last and what the costs, financial and other, are going to be. However, of note, the market does appear not to be pricing a disaster scenario outcome.
Oil yesterday leapt up by circa $10 per barrel. However, this only took place on the front month with 50% of that price rise having been discounted only a few months along the curve. In fact, the events over the weekend and yesterday have done nothing to change the price of oil towards the back end of the curve, beyond next year. Whilst it’s far harder to verify, based upon the unwinding of some safehaven demand in FX already, it seems markets are not pricing for a protracted state of war. Good news, perhaps, but the markets won’t dictate the course of this war meaning that if this instance of war-waging morphs to something bigger, a further correction could still be in store.
Discussion and Analysis by Charles Porter
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