Dow and S&P futures are down sharply following yesterday’s U.S. airstrike in Iraq that killed Iran’s top commander General Qassim Soleimani. Oil prices spiked alongside gold as tensions are approaching a critical level between U.S. and Iran. The Trump administration strike was a strong retaliation to the attack on the U.S. embassy in Iraq by pro-Iranian militiamen. Financial markets are now awaiting Iran’s response, which will likely have a wide-reaching impact on all asset classes. Iran may choose to target Americans abroad, cyber-attacks, along with further uprisings in the regions that will see U.S. troops on heightened alert in Iraq, Yemen, Syria and the Israeli-Lebanese border.
China’s Response
China, a close trading partner with Iran delivered a strong opposition to the U.S. decision to use of force and urged the U.S. to show some restraint. China will likely remain loyal to Iran and continue to attempt to de-escalate the situation. The risk of war between the U.S. and Iran is growing and that could easily take the focus away the U.S.-China trade war.
Since the 1950s, we have seen the S&P 500 index follow a 20% annual gain with an average 11% gain 15 times out of 18. The three times we did not see a gain were in 1962, 1981 and 1990. If history repeats itself, we could see these recent developments turn into another Persian Gulf War like we saw in 1990.
U.S. stocks could see investors quickly turn defensive over the risk of this becoming an extended wide-ranging conflict in the Middle East. The whole region is vulnerable and stocks still have further room to fall.
Oil
Oil prices are skyrocketing as fears escalate that the Middle East region is about to see intensifying conflict in the region that could eventually end up in war. Yesterday’s killing of a top Iranian commander is likely just the beginning of market moving responses. West Texas Intermediate crude and Brent are up sharply and could see another strong surge if the $65 and $70 price barriers are breached, respectively.
Gold
Investors have not priced in the chance of a full-blown out war in the Middle East, and gold will remain the favorite safe-haven trade. Other safe-havens, such as the U.S. dollar and yen will benefit from the developments in the Middle East, but gold will remain king. Gold prices could easily take out last year’s high and make a run towards $1,600 an ounce over the course of this month.