Oil, havens retreat as Iran waits
Markets can be absurdly quick to discount risk and recover
from geopolitical spasms, particularly those in the Middle East. US stocks
recovered to finish higher on Monday, bouncing back from their worst day in a
month on Friday and despite weakness in Europe. The Dow rallied
from a 200-pt drop to end up 68.5 pts at 28,703. The S&P 500 rose 0.35% to
end on 3,246. US 10s rose back above 1.8%.
Yesterday I’d questioned
how long the risk-off moves would last as, particularly as it entails fighting
the Fed, but the move back into positive territory was even swifter than could
The lack of any direct
response so far from Iran has becalmed markets. I would stick to the view that
that the regime is afraid of major open conflict and will seek to avoid it
whilst still ‘responding’ in some way. The US seems more ready for the fight
but cannot be seen to be the aggressor. But this risk rebound is entirely
contingent on Iran being cowed – if it does respond in a way seen to escalate
the situation – that is, push the two sides closer to open conflict – then the
risk play is unwound pretty
Iranian foreign minister Zarif – who has been denied a visa to attend
the UN Security Council in NY on Thursday, says the country’s response will not
be urgent. This has been followed by comments from the Supreme Council Sec
Shamkhani, who said that the ‘revenge operation’ against the US will be more
than one single operation. We will wait and see, but one senses that Iran
understands the US means business and needs to tread a tightrope to avoid a
So despite all the chest-thumping and threat of
retaliation, the fading in the geopolitical risk in a relative sense has
European stocks looking to open higher after a bit of a drubbing on Monday.
Having closed at 7575, the FTSE is seen up north of 7600, while the Dax is seen
almost 100 pts above 13,200.
Oil is retreating amid overbought conditions
and little in the way of fresh geopolitical or fundamental stimuli to drive
further gains. Yesterday’s candle suggests rejection of the $64 handle for the
time being and bears may take control now to fade the gap back to the rising
channel we’ve been in since the start of Oct. WTI balked at the 61.8%
retracement resistance at $63.70 and the failure to overcome the Apr 2019 highs
is suggestive that the rally has not got the legs – although we remain in a
broad uptrend, bulls have been overextended on this jump. The upside risk
remains though from any geopolitical fallout in the Middle East and/or disruption
to oil supplies around the Strait of Hormuz.
Likewise, gold has pulled back from its
highs to trade at $1565. The rally for gold is partly geopolitical risk but
look to the real US yield curve – 10-yr TIPS are almost negative again. If we
see US yields pick up over the coming days back towards 2% for the 10-yr then
it could be a fairly brutal unwinding for gold. Speculative net long positioning
has jumped above 305k and looks fairly
extended and crowded.
A weaker dollar is helping major peers. GBPUSD has
recovered last week’s falls to find support on the 23.6% retracement at 1.3140.
Look for this to hold to deliver a rally back to the 1.3250 level we saw at the
very start of the year.
EURUSD also firmer ahead of the CPI flash
estimate for the Eurozone at 10am GMT. Forecast at 1.3% vs the 1% last time.
The euro remains in a broad uptrend with near-term support on 1.110 and bulls
eyeing fresh eyes above 1.1240 once the 23.6% retracement level is cleared at
the 1.120 round number. US services ISM survey due later as well –
seen at 54.5 from 53.9 last time out.