Breakfast Bites - Middle East Strikes weigh on Markets
Oil spikes to above $70/bbl
Rise and shine everyone
It’s not a very Happy Friday!
We’ve got Middle East tensions flaring up overnight with Israel attacking Iran’s nuclear sites. Apparently, it won’t be a brief operation and they are preparing for a 14-day long attack. Seemingly, they smuggled drones into Iran to carry out this operation. President Trump warned Iran to make a deal. Israel says they had an implicit green light from the US administration and Iran has threatened to retaliate.
The result… Crude Oil breaks $70/bbl for the first time since April. US Equity Futures and global markets moved lower. There was also a spike in gold, as investors look at safe havens.
There’s been some reversal of these extreme moves, but the uncertainty still remains. There’s news of some intercepted attacks from Iran on Israel, but it remains to be seen how long it takes for this situation to be resolved, or how long it takes for the markets to start ignoring what’s going on.
Asian equities closed lower, and European equities are also under pressure. Airlines in particular are seeing their stocks take a hit with crude prices higher, and flights being diverted.
Unfortunately, I don’t think hedges were in place for an event like this. Yes, we’ve been seeing disagreements but, not full blown strikes. I live very close to the action, I really don’t want to see a prolonged conflict or an escalation. But, what we could see is elevated oil prices for a period of time.
JPM had forecasted oil at $73-$75/bbl when things started getting heated, a couple of days ago. “Tarek Hamid (Credit Research/Strategy) notes that Iran produces approximately 3 million bpd. Removing 1 million bpd from supply could push oil prices up by around $10 per barrel.” And this is a graphic from them, which isn’t a solid forecast but rather a point of reference.
The biggest issue for US - inflation! We’ve just gotten comfortable with the deflationary effects of oil prices. If we start to see tariffs weigh on prices and oil prices increases, we’re looking another spike and definitely no cuts from the Fed any time soon.
The bond market however, is still not pricing in a big move in rates.
What We’re Watching Today
News on the Middle East tensions - Markets could remain choppy. Oil prices could be an early indicator.
10 am ET - UoMichigan Preliminary Sentiment Data
Calendars
(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)
