The death of Iranian general Qasem Soleimani has hit global markets. Photo / File
The death of Iranian general Qasem Soleimani has hit global markets. Photo / File
Oil prices jumped while global stocks fell on Friday after the US killed a top Iranian military commander in an airstrike, shoving geopolitics to the top of investors' agenda for the new year.
Brent crude jumped 3.5 per cent to more than US$68 a barrel, putting the international oil benchmarkon track for its biggest gain in a month.
US stocks dropped as the S&P 500 slid 0.7 per cent — though better than a fall of 1.1 per cent in early morning trading. The Dow Jones Industrial Average and Nasdaq Composite also clawed back a portion of their losses in afternoon trading and were each down 0.8 per cent.
The pullback on Wall Street came a day after stocks began the new year with record highs. It also pulled the S&P 500 into negative territory for the week, snapping the benchmark's five-week winning streak.
In addition to Mideast tensions, investors parsed a survey showing the contraction in the American manufacturing sector worsened last month. The materials sector was the worst performer in the S&P 500.
Stocks also were down in Asia and Europe, with Germany's Dax leading declines with a 1.3 per cent fall.
"Geopolitical risks are still alive and kicking," said Elwin de Groot, head of macro strategy at Rabobank. "Over the past few years these risks have undoubtedly affected markets, but hardly with any lasting impact. Yet geopolitics remains important, if only because it could always turn into a more nasty factor for markets at some point."
Assets seen as shelters during times of strife pushed higher. Gold climbed by 1.3 per cent to US$1,549 an ounce, a near four-month high. Government bonds rallied, pushing the yield on 10-year US Treasuries down by 9.2 basis points to 1.7898 per cent. Similar price gains were seen in UK, Germany and other key European government bonds.
US President Trump has long criticised Iran. Photo / File
The Japanese yen — also considered a barometer of investors' levels of fear — moved higher. The currency pushed the dollar down by 0.4 per cent to ¥108.11 — the yen's strongest point since late October.
Emerging market currencies, such as South Africa's rand, came under pressure, again reflecting a general burst of nervousness. The dollar leapt more than 1 per cent to 14.297 rand.
Olivier Jakob, managing director of oil consultancy Petromatrix, said "the killing of Soleimani calls for a serious increase of the geopolitical risk premium".
"This was supposed to be a holiday week for many traders. Many will be cutting the holidays short and called in for an emergency risk meeting," he said.
Analysts at Citi said oil prices could pop above $70 a barrel soon, but added that "there could be bearish factors at work later in 2020, with the possibility that Iran and the US could find common purpose in working out a new agreement".
Explaining its rationale for the air strike, the White House said the US had taken "decisive defensive action" to protect its personnel abroad by killing General Qassem Soleimani, the head of the Iranian Revolutionary Guards' overseas forces. Washington blames Tehran for an attack this week on the US embassy in Iraq and said Soleimani was "actively developing plans to attack American diplomats and service members in Iraq".
Pakistani Shiite Muslims demonstrate Friday, Jan. 3, 2020 in Karachi, Pakistan, over the US airstrike in Iraq. Photo / AP
Ayatollah Ali Khamenei, Iran's supreme leader, vowed on Friday to take "tough revenge" for the death of Soleimani, saying "the resistance movement will continue with double motivations".
The potential longer-term impact on markets hinges on what form that "revenge" takes.
"The wild card is whether turmoil in the Middle East triggers a sustained sell-off in equities, depressing business and consumer confidence to the point where labour market and inflation concerns become secondary," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
"We'd be surprised, but if Iran takes more drastic action than we are expecting, it will become a real risk. In the meantime, expect defensive stocks to outperform, with downward pressure on Treasury yields and gains for safe-haven currencies."
Written by: Adam Samson, Alice Woodhouse and Matthew Rocco
