Forecasting

Crossing the Rubicon

Not the start investors were looking for as immediate concerns fall on Iran’s retaliation in the wake of the US airstrikes.
 
Asset markets reacted reasonably and predictably with gold trading above $ 1550/oz and Brent temporarily nudging above $ 70.00 per barrel’s as Traders hedged the heightened geopolitical tail risk following the successful US targeting of Qassem Soleimani. The moderate, knee-jerk risk-off move (dollar slightly higher, oil/gold higher, equities lower, and yields ticking down) could very well be a bit of an overreaction. But fears over just how far both sides are willing to escalate the situation will likely limit the extent to which these haven hedges unwind.

Oil Markets
 But even $65 WTI oil (current $63) is unlikely to be a significant hindrance to the US consumer. And unlike the attack on the state-owned Saudi Aramco oil processing facilities at Abqaiq, the surge in oil prices is being driven solely by an increase in the geopolitical risk and war premiums and not a supply disruption. This dissimilarity creates a significant differentiation when factoring it into the current supply and demand calculations. The former we can quantify, the latter we can't. So, into next week, the focus is already back on the next wave of Middle East headlines to move markets, rather than for follow-through of last week's US military actions.  

 
Could Iranian retaliation change this calculation? Yes! But the likelihood of a retaliatory strike of significant magnitude is remote...