Markets are overshadowed by news that Iran directly attacked Israel in retaliation for the bombing of its embassy in Damascus which killed two high-ranking Iranian generals.
This is a significant escalation in Iran’s on-going proxy war against Israel.
Russia and its allies are emboldened by the US failure to support Ukraine and are stepping up their attacks on Western allies.
Mick Ryan (retired Australian Maj. General) writes:
…What is Iran’s ultimate goal here and its strategy to achieve it? This is a major shift in the way the Iranians have attacked Israel for years. Proxy forces are normally Iran’s preference in order to keep it at arm’s length from a potential Israeli response. Why has it decided on such a drastic course change in its strategy to confront Israel?
He lays out four options for retaliation — ranging from no direct response to a massive hammer blow to deter a repeat — and concludes:
All of these are possible in the hours and days ahead. All have advantages, as well as considerable disadvantages, for the Israelis. But one thing is certain, the concept of ‘re-establishing deterrence’ against Iran will be an important guiding idea.
And, it is uncertain whether the Iranians are really prepared for what they may have unleashed against their country and the wider region.
Flight to Safety
Given the high level of uncertainty, we can expect a significant flight to safe haven assets. Stocks are expected to weaken, with the S&P 500 breaching support at 5100 to signal a secondary correction.
The S&P 500 Equal-Weighted Index ($IQX) has already warned of a market move to risk-off after breaching support at 6650. A test of support at 6400 is likely.
The Russelll 2000 Small Caps ETF (IWM) has similarly breached support at 200, warning of a correction to 190.
Brent crude is expected to test resistance at $96 per barrel.
10-Year Treasury yields are already retracing and headed for a test of new support at 4.35%. Respect is likely, however, and would confirm an advance to test resistance at 5.0%.
The Dollar Index may not follow 10-year Treasury yields, with safe haven demand fueling a test of 107.
Gold saw significant profit-taking on Friday after reaching our target of $2400 per ounce earlier in the day. Retracement is likely to respect support at $2300, followed by a strong advance fueled by safe-haven demand.
The international contract on the Shanghai Gold Exchange (iAu99.99) is trading at 562 Yuan/gram. This equates to a USD price of $2415 per troy ounce — a sizable premium over Friday’s close at $2344.
Silver has retraced to test support at $28 per ounce. Respect is likely, signaling a test of resistance at $29 per ounce. Breakout above $29 would offer a long-term target of $36 per ounce.
Bitcoin is consolidating below resistance at $72K. Breakout is likely and would offer a target of $92K, while reversal below support at $64K would warn of a correction to test $52K.
Conclusion
Escalation in the Iran-Israel conflict is likely to drive crude oil prices to new highs as geopolitical risk rises. Inflationary pressures are expected to climb as a result, reducing the possibility of Fed rate cuts this year.
Other geopolitical factors could intervene, including the Saudis increasing production to hold crude oil prices below $100 per barrel. Above $100 is considered unsustainable by many producers and believed to lead to sharp falls in demand as the global economy contracts in response.
Financial markets, stocks and precious metals are likely to be dominated by safe-haven demand in the weeks ahead. A shift from small caps — and even the broad S&P 500 to the largest “magnificent seven” tech stocks — is expected as investors grow increasingly risk averse. Demand for Gold & Silver is expected to rise. The Dollar is likely to strengthen, along with short-/medium-term Treasuries. But long-term yields are unclear because of conflicting inflation/safe-haven pressures.
Acknowledgements
- Mick Ryan: Futura Doctrina – Iran Attacks Israel
- CoinDesk: Bitcoin Prices