Asia Wrap: the mood has darkened considerably

The mood has darkened considerably as the US Mideast strike undercuts the overall constructive sentiment supposition. US futures are down over 1% from their peak, gold is up, and Treasury yields lower.  I expect tensions to intensify before abating, and we should anticipate defensive strategies to flourish.

Frankly, I'm surprised gold hasn't traded above $1550/oz, and equally nonplused Brent crude hasn't convincingly breached $70 per barrel, but that may come in good time if US-IRAN continues to march down that road of no return.

But as I learned in trading 101 many moons ago is that its critical to not only understand oil prices far-reaching correlations across a plethora of asset classes but, more importantly, to hedge the tail risks. And the prospects of a middle east war is a mightily huge tail risk to hedge.

However, for US equity markets, it's not as clear-cut risk-off as one might imagine. While war is hell, it's not necessarily bad for stocks as the US equity markets tend to rally whenever the US begins military operations overseas. But given the blistering record pace that US equities have been on, I would expect investors to flip those profitable trades rotating under the safety umbrella of US Treasuries with a sprinkle of gold dust for good measure.

The Japanese Yen, along with the US Dollar, are likely to be big winners. Yen for its intrinsic safe haven properties and the USD benefits since US treasuries should attract their lions share of safe-haven demand.

A massive session for gold in Asia, as market sentiment turns risk-negative on news that a US airstrike in Iraq killed a top Iranian commander. All the while, the yellow metal remains very well supported by the strong seasonal performance for gold in January. The recent high of $1557/oz is the critical resistance to watch.