How does the Trump-Tehran's Tussle Tremble the Capital Market
After the United States openly targeted and killed a top Iranian commander, tensions in the Middle East reached a new level. Iran retaliate with missile strikes and unraveled the nuclear accord. It even came with the tragic, unintended costs -- Iran admitting it mistakenly shot down a Ukrainian passenger jet, killing all 176 people on board.
The world was on the verge of a full-blown war. The unexpected timing of escalation, the geopolitical sensitiveness and the economic significance of the parties involved further added complexity into the issue, leaving investors worldwide to make all sorts of rational and irrational responses. As a result, the capital market trembles in temporary confusion.
The oil market responded first to the new Gulf Crisis. Thanks to the US’s escalation of the Middle East tension, in the first week of 2020, the world observed the Brent oil price rise 5.41 USD from 66.34 USD to 71.75 USD per barrel, an increase of 8.15% in 4 days and the highest since mid-September 2019. However, Morgan Stanley analysis suggests that the Brent Oil should stabilize at around 60 USD per barrel for 2020.
This immediate jump of the Brent Oil price should not be a surprise considering the energy superpowers involved. On one end, Iraq is the second-largest oil producer in OPEC, the third-largest oil exporter in the world, contributing 8.1% to the total oil supply. On the other end, Iran is the fifth-largest in OPEC, seventh in the world, contributing 4.5% to total oil supply. Iran’s missile strikes on a US base in Iraq has inevitably triggered fear in the oil market as investors are worried about possible attacks on oil facilities in Southern Iraq that could affect crude supplies into Asia.
Major Asian countries — like Japan, South Korea, China and India — rely on the Middle East for oil. As a result, the potential shortage in supply created fear in the commodity market in Asia, as the Shanghai Crude Oil futures increased more vigorously by 10.0% in the same four day period.
On the demand side, there is also a link between a potential war and the oil price, although it plays a less significant role. If the Gulf Crisis continues to intensify, the world’s demand for oil is likely to increase further due to military demand.
Fortunately, the tussle did not eventually lead to a full-blown war, which could potentially fuel an energy crisis across the globe. Yet, the de-escalation caused the oil market to make an abrupt adjustment- Brent oil subsequently dropped almost 5% when U.S. President Donald Trump said Washington would impose sanctions on Tehran instead of another military strike as feared by some investors.
In general, this fleeting oil crisis came in a rather mild extent as compared to the previous few. For the second US-Iraq War, prices for US crude oil spiked $10 per barrel overnight. The reason behind this lukewarm reaction could be the increase in the non-Middle East countries which reduced the OPEC’s influence over the oil market. As the oil price rises, the US Shale oil (the oil’s largest oil producer) production would increase the quantity supplied in the market. Russia and Venezuela also constantly expand their oil export to support the economies. Though the oil price has stabilized at around 65 USD per barrel, the situation remains volatile and the likelihood of possible strikes on tankers or oil facilities in the region remains.
The yellow, which is commonly regarded as a haven asset in times of uncertainty, continues to outshine the rest. As the regional strife intensifies, the spot gold price rose 1.6 per cent to $1,579.72 per ounce, its highest since April 2013.
As I mentioned in my previous article Why the Precious Metal Shines the Most in 2019?, since 2019 the complexity and volatility of the global macroeconomic landscape has attracted a plethora of investors with different objectives to rush into the gold market. Some investors were looking for a safe haven, whereas others took a more opportunistic approach as the fire in the Middle East ignited the opportunities for investors to take a short-term advantage from the instability. Hence, the world witnessed a sharp increase. Yet, Gold also fell below a key psychological level as initial fears eased. As the short term opportunists decided to leave when the situation showed signs of stabilization, the precious metal was 1.30 per cent higher on the spot market at US$1,594.33 per ounce, having earlier blasted through US$1,600.
However, the risk-averse sentiment is likely to cloud the rest of 2020. One of the main reasons is that central banks “are back to buying gold.” Negative bond yields mean that gold – which at least yields a little less than 0% (after storage costs), rather than a lot less – suddenly looks like an acceptable reserve asset, especially considering that the gold can hedge against the USD currency fluctuation.
Moreover, as a result of decades of revolutionary Islamic governance and waves of US sanctions, Iran, both the government and people, has been active in hoarding gold ahead of potential uncertainty. In 2019, the country bears more than 59% of the annual inflation rate. The Iranian currency, the rial, is literally worthless, thanks to the most recent US economic sanction. In the light of the bleak economic prospects, demand for gold bars and coins in Iran tripled year-over-year, according to a World Gold Council report. Iran’s central bank has minted hundreds of thousands of new coins—more than 60 tons of gold in total—to feed the demand.
Overall for stock market, it is fair to conclude that the US market was barely affected by the Crisis because the upbeat momentum of NASDAQ and S&P 500 remains strong. Meanwhile, Asian markets fluctuate in different extents in the first two weeks of January 2020.
After Trump’s statement on 7 Jan, China’s blue-chip CSI300 index was 1.18 percent lower but it reclimbed back in the next few trading days. Singapore stocks also sank after trading began on 8 Jan. The Straits Times Index plunged 1.4 percent to 3,208.04 when the market opened before recouping most of its losses to trade down 0.3 percent at 3,239.02 when the market closed.
Tokyo stocks sank the most on Wednesday, with the Nikkei index briefly falling over 600 points to below the 23,000 line for the first time since November. The 225-issue Nikkei average ended down 370.96 points, or 1.57 percent, from Tuesday at 23,204.76. This could be a result of Japanese investors raced for safe-haven assets, with the U.S. dollar dropping to a three-month low of around ¥107.65. The commonly recognised risk-free Japan government bond was also in high demand.
Within the US market, defense stocks certainly rode on the wave of the regional turmoil. Defense stocks including Northrop Grumman, Lockheed Martin, and Raytheon leaped after Iran launched missile strikes on two military bases housing US troops. Northrop Grumman and Lockheed Martin, both major players in the aerospace sector, traded as much as 1.2% higher in 7 Jan morning. Raytheon jumped about 0.9%. Aerospace and defense companies typically surge higher in the wake of new threats of war. The firms supply key parts, vehicles, and weapons to the US military, and wartime often drives increased orders for their products.
Boeing, however, was the unfortunate exception which not only failed to take advantage of the geopolitical tension but also plunged further. For a company that was already deep in crisis, the incident of a Ukrainian 737-800 plane crashing in Tehran caused shares in Boeing to down 2 percent in premarket trading. Because an engine caught fire shortly after takeoff and the pilot was unable to regain control, there are increasing rumours regarding 737’s failures, especially given that there were so many accidents happened regarding 737 max in 2019. Though it was eventually discovered that Iran shot down the plane, Boeing stock showed no signs of recovery and barely reaped any advantage from the surge of the aerospace and defense industry.