- Trump orders attack on Iran as Middle East descends into chaos
- Oil shoots higher despite OPEC+ increasing output more than expected
- Investors flock to gold, dollar and Swiss franc for safety as stocks tumble
US and Israel launch strikes on Iran
The recent diplomatic efforts by US and Iranian negotiators for a nuclear deal proved fruitless on Friday when President Trump ordered military strikes on the country, with Israel joining its American ally in the massive offensive. Iran retaliated, hitting US bases and interests across the Middle East, with the United Arab Emirates, Bahrain and Qatar being among the countries caught in the crossfire.
It seems that Trump was intent on regime change in Iran, with the talks likely being used as a distraction to catch Tehran, and the world, off guard. However, even if the President went into the negotiations aiming to get a deal, there was little chance of Iran agreeing to all of America’s demands. Hence, strikes were always on the cards and why there was such a heavy US military buildup in the region beforehand.
Trump also possibly saw a closing window of opportunity to take decisive action in Iran, as Congress is scheduled to debate and vote this week on limiting the President’s powers on any military intervention in the country without lawmakers’ approval. But despite some doubts about the legality of these attacks, given that they were unprovoked, the US is now likely embroiled in a messy war that could last several weeks, if not longer.
The killing of Iran’s supreme leader Ayatollah Ali Khamenei may have raised some hopes in Washington that this would be a brief conflict, but Iran has already appointed an interim supreme leader and is showing no signs of scaling back its counter attacks, while rejecting Trump’s offer for new talks.
Gold, dollar and franc shine but yen slips
Nevertheless, as the world watches on, there is some optimism that the Trump administration will not want this war to drag on for too long, especially as the US mid-term elections are approaching. But perhaps more importantly, few believe that Iran will be able to keep up its retaliation for much longer, even as Trump warns of more US casualties.
This may be keeping markets relatively calm for now, with the reaction so far being expected but not overly dramatic. Having already edged up over the past month amid the rising geopolitical tensions, it’s no surprise that gold is surging today to test the $5,400 level. The US dollar is also enjoying some safety bids, jumping to a one-month high against a basket of currencies, while the Swiss franc is in demand too.
The latter’s strength, particularly against the likes of the euro, which has fallen to its lowest since January 2015, has prompted the Swiss National Bank to issue a warning on Monday that it is willing to intervene in FX markets to prevent the “rapid and excessive appreciation” of the franc.
There are no warnings for the moment, however, from Japanese officials about the yen’s latest slide against the dollar, which is back in the 157-yen region. The US-Iran escalation threatens to push back the timing of the next rate hike by the Bank of Japan, with a move as early as March looking extremely unlikely.
Oil futures surge on Iran tensions but OPEC+ hike caps gains
Unsurprisingly, the biggest reaction is in oil prices, as Iran supplies 3% of the world’s crude oil. WTI oil futures spiked by more than 12.5% and Brent futures by more than 13% as trading started on Monday, but both have since eased to stand around 8% higher during the European session.
The biggest danger for energy prices is of course if Iran were to completely block the Strait of Hormuz. Tehran has already attacked four ships in the area, forcing oil tankers and other vessels to divert to other routes. If ships continue to avoid the Strait of Hormuz out of fear of coming under Iranian fire, it could affect 20% of global oil and gas supplies.
In the meantime, OPEC+ has announced it will resume its output increases as of April following its monthly meeting yesterday. The oil cartel has agreed to raise production by 206,000 barrels per day (bpd) as of April, which is more than the rumoured 137k bpd that was expected, likely in response to the developments of the past few days.
Still, the amount is probably not enough to offset a potential energy crisis and offers only a temporary relief in keeping prices down. With already some signs of the war broadening after Israel and Hezbollah in Lebanon began exchanging fire, it’s too soon to put a cap on oil’s upside from the conflict.
A sea of red for stock markets
In equities, most Asian indices closed lower and European shares are down too. US stocks ended Friday down as Trump announced the strikes and Wall Street futures are currently in the red by around 1%. On the whole, stocks appear to be holding up when considering the ongoing AI jitters, not to mention some winners in the energy and defence sectors.
Assuming there is no major escalation over the next few hours, the focus later today will be on the ISM manufacturing PMI for February before attention turns to Friday’s jobs report.
On the earnings front, retailers are in the spotlight this week, with Target and Best Buy announcing their results tomorrow and chipmaker Broadcom testing the AI nerves on Wednesday.