Wait-and-see with geopolitics

Time heals all wounds, or at least the market kind with the absence of further military conflict in the US-Iran tensions inviting investors to once again focus on the slew of positivity prior to which. Wall Street kickstarted the week in moderate gains, the comprehensive S&P 500 index maintaining the holding pattern as we expected at the start of the week. Investors remain awaiting next week’s leads in the form of US bank earnings and the US-China phase one trade deal signing with some positivity. To some extent, the limited rebound in the overnight session nevertheless marks a sign of cautiousness that could take time to fade.

With haven assets, one would note that gold prices had given up some of its lustre, though holding grounds above $1560 and keeping its position as a favoured hedge in the face of elevated geopolitical risks. USD/JPY likewise edged back above the $108 handle, finding strong support, and oscillating $108.40 levels when last checked. While the newfound willingness of the US to act in the face of threats had prompted some beliefs that greater restraint on Iran’s end may be seen, the extent of the uncertainty remains one that few may be able to put a finger to. The US-Iran conflict may well be a long-drawn process, providing market drivers in the twist and turns of the issue.

Crude oil watch

One thing coming into the focus for markets given its widespread implications had been the surge in crude oil prices, seeing Brent crude trading briefly past the $70 per barrel (bbl) handle at one point at the start of week. Risk aversion reigns strong amid the latest eruption of concern over the geopolitical tensions in the Middle East. For crude prices, the crux of the issue lies with supply as the operations around the Straits of Hormuz comes under threat with potential escalation of military conflict in the region. The exchange of threats between US and Iran over the weekend further cements the market’s belief that we could be seeing more intensifying of tensions, but the likelihood of an all-out war which the market was attempting to price is highly uncertain. Any spaced-out retaliations could cap the upside. Ultimately it is a supply and demand game for crude oil prices and with demand outlook having improved on reduced US-China tensions, the lack of any major supply disruptions provides little impetus for crude oil to accelerate its gains. Correspondingly, the implications on energy importers may also be measured.

Yesterday: S&P 500 +0.35%; DJIA +0.24%; DAX -0.70%; FTSE -0.62%