Middle East embers look set to ignite

Stephen Innes SPI Asset Management

It is was punishing day for equity markets as smouldering middle east embers look set to ignite into raging geopolitical firestorms after President Trump warned Russia “get ready “for missiles being launched at Syria.

War drums, tweets and the FOMC minutes made for a chaotic session with the Syrian conflict up front and centre but adding to regional tensions, Saudia Arabia shot down two missiles sent from Yemen over Riyhad.

Predictably, equity sentiment ran sour all day as investors move from trade war fires into the geopolitical frying pan as a thick geopolitical stew of fear brews. But as the day wore on, political moods tempered on as did the markets negative sentiment.

The FOMC minutes were interpreted as hawkish and provided investors reasons to buy back some USD, but not excessively so. With the war drums quietly beating in the Whitehouse, markets tend to ignore the “run of the mill” type issues like FOMC minutes.

Oil Markets

Escalation and provocations in the middle east are driving oil prices higher, and we could be setting up for an eventual test of $70.00+WTI. Oil prices are already up 8 % this week on the Syrian conflict, but if we start to factor on Saudi, Iran and Isreal into the escalation matrix, we could be looking at WTI beyond $75.00 in a heartbeat.

Case in point middle developments crowded out a soft DoE inventory report, which showed a headline build of 3.3mn.

Gold Markets

Very much a binary trade at this stage as the markets start to factor in possible middle east escalation.While we expect volatility to remain high, gold will stay supported so as long as US military option remains on the table, gold will continue bid.

But we could see prices rocket higher If both the US and Israel get drawn into the fracas siding with Saudi Arabia in Riyhad escalations with Tehran. A test of $1400 +would be on the cards immediately

Currency Markets

FX markets have been in stasis again, but players remain on high alert for middle east escalation.

The Japanese Yen

Makes sense to stay long JPY amidst a massive uptick in geopolitical tensions. But why we haven’t taken out essential support at 106.60 remains a bit of a head-scratcher

The Malaysian Ringgit

Risk aversion has weighed down Ringgit sentiment overnight. And the lack of activity on domestic bond markets suggests the Ringgit will be hard pressed to make substantial gains ahead of the election.

Oil prices remain incredibly supportive, but with the market in full risk-averse mode, there remains little appetite for the MYR these days.

Author

Stephen Innes

SPI Asset Management

With more than 25 years of experience, Stephen has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.

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