Investors on Friday fled to safe-haven assets after a US strike that killed Iran’s revered General, Qassem Soleimani, heightened fears that both countries will engage in a military face-off, sending low-risk assets including oil to early gains and gold near a four-month high.
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The trump-ordered killing of the head of Iran’s elite Quds Force saw bullion rise in early trade by about 1.4 percent to $1,550.43 per ounce, the highest level since price hit $1,552.55 last September. Oil rose as high as $69.35 per barrel, almost 5 percent gain in the intra-day trade.
Other assets including the US bonds and Yen gained, while US stocks fell as investors reacted to the news of Iran’s Supreme Leader Ayatollah Ali Khamenei vowing to avenge Soleimani.
The market feared disruption to oil-supply in the events of a conflict in the oil-rich Middle East.
However, Chief economist of Renaissance Capital Ltd, Charlie Robertson told Bloomberg that there are key buffers in place to withstand the ever-present risks to oil supplies.
“Strategic petroleum reserves are probably large enough in the US, China and the EU to cope with disruption to Saudi oil facilities or the Straits of Hormuz,” he said.
Higher energy costs would raise production cost and weigh on demand in economies that rely on oil; this would be a drag on global growth.
While upside risks to energy cost are expected to subside, just as it did in September when supposed-Iranian drones attacked a Saudi Arabian oil facility, there is still risk that the US-Iran conflict could unsettle the Middle East over the foreseeable future, at least.
US has asked its citizens to leave Iraq, where the Iranian top General was killed in an airstrike. Uncertainty looms as Iranians denounced US and its leaders said that “harsh retaliation is waiting”.
The recent events suggest that expectations of a less-turbulent geopolitical space that would support growth in 2020 might have been a bit idealistic, although it is still too early to tell.
The US-China long trade war that inflicted both of the world’s largest markets and robbed global economies of faster expansion is de-escalating, informing a favourable growth outlook for the New Year.
Washington has already set January 15 as the date to sign phase one of a trade deal with Beijing, but US’s action against Iran might cause new worries.
For gold, the impact of a US-Iran conflict might not be a tailwind to support price.
Geopolitics typically don’t have a lasting impact unless broader consequences for the economy or financial markets arise, Carsten Menke, an analyst at Julius Baer, told Bloomberg.
