LONDON (Reuters) – Oil prices jumped nearly $3 a barrel and gold, the yen and safe-haven bonds all rallied on Friday, after the U.S. killing of Iran’s top military commander in an air strike in Iraq ratcheted up tensions between the two powers.
Traders were clearly spooked after the death of Iranian Major-General Qassem Soleimani, head of the elite Quds Force and one of the country’s most influential figures, and a vow by Iranian Supreme Leader Ayatollah Ali Khamenei of revenge.
The Middle East-focused oil markets saw the most dramatic moves with Brent crude futures leaping as much 4.5% to $69.20 a barrel, their highest since September, though the impact was felt across almost every asset class.
Europe’s STOXX 600 and Wall Street futures both fell around 1% as New Year optimism evaporated. The yen JPY= rose half a percent to the dollar to a two-month high and the Swiss franc hit its highest against the euro since September. EURCHF=
“Geopolitics has come back to the table, and this is something that could have major cross-asset implications,” said Lombard Odier’s chief investment strategist, Salman Ahmed.
“What is critical is how it pans out in the next few days,” Ahmed said. “Whether it turns into a theme depends on Iran’s reaction and then the U.S. response.”
Soleimani’s Quds Force and its paramilitary proxies, ranging from Lebanon’s Hezbollah to the PMF in Iraq, have ample means to mount a response.
In September, U.S. officials blamed Iran for a missile and drone attack on oil installations of Saudi Aramco, the Saudi state energy giant and world’s largest oil exporter.
The Trump administration did not respond, beyond heated rhetoric and threats, and markets settled down within a week. But Friday’s attacks saw governments, including the U.S., urging citizens in the region either to return home or to stay away from potential targets and public gatherings.
U.S. Secretary of State Mike Pompeo said in a round of TV interviews that the United States remained committed to de-escalation with Iran but that it had needed to defend itself.
“He (Soleimani) was actively plotting in the region to take actions – a big action as he described it – that would have put dozens if not hundreds of American lives at risk. We know it was imminent,” Pompeo told CNN.
With around an hour to go before the start of Wall Street trading, Dow 1YMcv1, S&P 500 EScv1 and Nasdaq NQcv1 futures were down between 1% and 1.2% despite the jump in crude pushing oil majors like Exxon Mobil (XOM.N) and Chevron (CVX.N).
(COLUMN-Soleimani strike will be felt well beyond Middle East: Peter Apps)
(Graphic: Geopolitical tensions rattle world markets click, here)
SCRAMBLE TO SAFETY
German Bunds and U.S. Treasuries – the world’s benchmark government bonds and typically seen as the safest assets – caught a bid, too.
U.S. 10-year yields, which move inversely to prices, fell 5 basis points to a three-week low and Bund yields dropped away from seven-month highs they had touched at the start of the week. [GVD/EUR]
The focus on geopolitics meant markets paid little attention to stronger-than-expected data from France, where inflation rose 1.6% year-on-year in December, beating analyst expectations for a 1.4% rise.
German inflation figures were also higher although unemployment in Europe’s largest economy rose more than expected, other data showed. Investors also have the minutes of the U.S. Federal Reserve’s Dec. 10-11 meeting due at 1900 GMT.
“Markets still remain quite thin after the holidays, but even in a regular session we would have seen a similar reaction,” said Christian Lenk, a rates strategist at DZ Bank in Frankfurt, referring to the Middle East-sparked drop in yields.
The air strikes in Iraq had also killed top Iraqi militia commander Abu Mahdi al-Muhandis. They prompted strong critcism from Iraqi Prime Minister Adel Abdul Mahdi and some of Donald Trump’s main political opponents in Washington. Most of the international community called for a de-escalation.
Back in the markets, gold, the other traditional refuge for risk-averse investors, rose 1% to a four-month high of $1,545. For the week, it has gained about 2% and is heading for a fourth consecutive weekly increase.
“After the recent escalations in geopolitical issues, we see a resistance level near the $1,575 level for the next week,” said Jigar Trivedi, a commodities analyst at Anand Rathi Shares & Stock Brokers in Mumbai.
Additional reporting by Sujata Rao and Dhara Ranasinghe in London and Diptendu Lahiri in Bengaluru; editing by Larry King and Nick Macfie