Morning Brief – Fun while it lasted

Fun while it lasted

The flight to safety and risk-off fire sale sparked by the events following the assassination order of Iranian General Soleimani seem to have been erased by markets as we open in Europe this morning. Cable (GBPUSD) trades almost exactly in line with where it did this time last week despite a high level assassination and 16 missiles being fired at coalition forces in Iraq from Iran. There have been two loops on the Iranian rollercoaster this week. The upswings in tension unsurprisingly occurred during the late night/early morning of Thursday/Friday the 2nd/3rd January during the assassination order from the White House and execution on the ground. The second upswing was caused by the ultimately underwhelming Iranian response on Tuesday night.

The retaliation was not the eye for an eye that the market had braced for. Can we consider the death of Iran’s General, widely regarded as second in command, for no deaths at a military base in Iraq as equal? Perhaps the lines of communication via the back door of Switzerland that took place this week allowed tensions to cool in an off the record diplomatic effort. Because the tasting of the pudding did not contain the proof (yet) of the expectations that the market had priced in, risk assets lost their ground once again. The riskier currencies used to finance their acquisition (ZAR, INR and GBP to name but a few were simultaneously reacquired). The same was true earlier this week when the weekend and Monday passed with nothing but rhetoric from official and unofficial sources in Iran. The two downward passages of our loop-the-loops and those which have on two occasions wiped out any price determined evidence of any geopolitical instability are evidence of the market believing that the all-out war they initially feared was increasingly unlikely.

With the passing of Trump’s more diplomatic (read teleprompted) speech yesterday afternoon UK time, the market now believes the flare up in conflict is largely over. Economic sanctions will instead be the soft weapon of choice for the White House with Congress also making moves to preclude some future unilateral actions by the White House. As markets and the world breathe a slight sigh of relief, let’s not forget that the arduous sanctions on Iran have been a significant contributor to the realised acts of aggression. With the nuclear accord (officially the catchily named Joint Comprehensive Plan of Action) still in disarray, the problem of Iran is far from solved. At most we can suggest that, for now, markets can turn to other things to motivate price action.

In the UK yesterday Ursula von der Leyen spoke at the London School of Economics before meeting with the Prime Minister. Her speech, delivered to a room of students crowded by a small army of tv cameras and journalists, did not scorn the British government away from its endeavours for a deal come December 31st 2020. Instead it contained pragmatic admonitions to the negotiating teams and government to prioritise what elements of a trade accord they wish to achieve in such limited time. Cards are still very close to Brussels’ chest with the Commission President revealing nothing in LSE’s ‘Old Building’ that we didn’t already know. Hopefully behind the doors of Number 10 Johnson received better and more meaningful guidance of Brussels’ red lines.

Along with the lack of new information and pessimistic tone the Pound drifted lower. Trade in goods always took the front end of the President’s sentences and at each opportunity doubt was cast over the propensity to create as deep a services deal as that for trade in goods. We leave the European Union in 22 days and future global, as well as European, trade deals will soon dominate the focus of Sterling traders.

Discussion and Analysis by Charles Porter

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