US Open – Mideast Tensions continue to drive safe-havens(Treasuries, Yen, Gold), Oil pares gains, Bitcoin’s volume woes

Global equities continue to slide as financial markets brace for Iran’s next move following last week’s killing of Iran’s top commander General Qassim Soleimani.  Today, Tehran had Soleimani’s funeral, so we might not see any of the “severe revenge” plans take place just yet.  Financial markets are widely expecting one of Iran’s next move to be a military response that will lead some loss of American soldiers. 

President Trump continued to ratchet up pressure on Iran over the weekend by tweeting, “Let this serve as a WARNING that if Iran strikes any Americans, or American assets, we have targeted 52 Iranian sites, some at a very high level & important to Iran & the Iranian culture, and those targets, and Iran itself, WILL BE HIT VERY FAST AND VERY HARD.”   Many Congressional Democrats are upset that President Trump did not consult them prior to last week’s airstrike and are seeking a vote on a war powers resolution this week.  It is unclear if the Democrats in the House will have enough support to get this vote passed, but it is clear they want to limit the President’s military response to when Iran responds.   

Many leaders are against Trump’s threat of targeting cultural sites, but none of this may matter if Iran’s next move leads to a significant loss of American lives.  The US and Iran are inching towards a military conflict that could easily deliver a 10% correction over the next couple weeks.  If S&P 500 futures break below 3,000, key support will come from the 2,940 region.  The overall 2020 bull case still remains in place as expectations remain for Iran’s response to be somewhat measured as they will not seek to fully trigger a war, as they cannot match the military might of the US.  US stocks have room for further downward pressure but should still remain attractive as the US consumer remains strong, the Fed is on hold and economic growth should still remain around the 2% level this year. 

Treasuries

Yield-curve steepening bets are struggling as Middle East tensions are driving up demand for safe-havens.  The yield on the 10-year Treasury almost topped 1.95% last week and now finds itself settling below the 1.80% level.  The defensive move is likely to persist and curve steepener trades could struggle as markets abandon the global reacceleration trade for now. 

Yen

Dollar-yen found some support to start the week following improved eurozone services PMI data that suggests stabilization in the region.  The currency markets remain focused on Middle East tensions and if we see risk-off day, dollar-yen could target 106.50. 

Oil

Oil prices wild ride continues as Middle East tensions have raised the risks of disruptions in the energy space.  Iran’s response to the killing of their top commander could lead to a military conflict in a key oil-producing region.  We could possibly see some disruption in the Strait of Hormuz, which in 2018 handled 21 million barrels of crude a day, well over 20% of the world’s oil transits. 

Oil prices are still at risk to another surge if Iran’s response has a direct impact to oil production or transportation.  It seems unlikely, but if we saw the Strait of Hormuz shut down oil prices could surge over $20.  Any major disruption to the Strait would quickly see action by the US, Europe and China with the use of their respective strategic petroleum reserves. 

Gold

Gold prices could continue to accelerate higher as Middle East tensions intensify and as investors turn cautious on global equities in the short-term.  Financial markets are seeking comfort in gold as they have no clue on how and when Iran will respond to last week’s killing of their top commander. Despite gold’s surge to the most overbought level in two decade, we could see further bullish momentum on the break of the $1,600 an ounce level.  If gold fails to crack $1,600 in the next couple of sessions, we could see profit taking temporarily see prices ease towards the $1,560 region. 

Bitcoin

Bitcoin’s limited safe-haven gains could be running out of steam in the coming days as volumes fall to the lowest levels since April, back when prices were barely hanging onto the $4,000 level.  If Bitcoin does not break out above the $8,000 level this week, we could see crypto sellers return aggressively.   

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