Suleimani killing: Three reasons a US-Iran war may break out and potential market impact

This is the real thing. Tensions simmering in the Middle East tend to have a transient effect on oil prices – but President Donald Trump's order to take down Qassem Suleimani may have a much broader impact on the global economy and all currencies. 

There are three major reasons why the killing of the Quds force commander is not like anything seen in recent years.

1) Suleimani is a state actor

The US assassination of the general leading the Quds force has been quickly compared to the ones of Al Qaida leader Osama bin Laden and ISIS founder Abū Bakr al-Baghdadi. However, there are several significant differences between the moves.

First and foremost, Suleimani is an official of a sovereign state. Iran is the world's 18th most-populous country and the world's 17th in the territory. The leaders of the terrorist organizations were not backed by any country.

Moreover, when bin Laden and al Baghdadi were killed, their power and organizations had been in decline for years. Suleimani was gaining more and more strength in spreading the Islamic Revolution beyond Iran's borders, creating a Shiite crescent of influence spanning Lebanon, Yemen, Syria, and Iraq – with substantial success.

And, the late general was considered by some as No. 2 in the regime, second only to supreme leader Ali Khamenei. The latter, ruling Iran for over 30 years, has nurtured Suleimani. Tehran announced three days of mourning, which also shows the importance of the man.

2) Iran has high capabilities

The Middle East's second-largest nation in terms of territory sits on around 150 billion barrels of proven oil reserves. More importantly, it holds one side of the Persian Gulf and the all-important Straits of Hormuz – where about one-third of the world's liquified natural gas and almost a quarter of the total oil consumption passes by.

Iran's Revolutionary Guards and the army can close the Strait and inflict substantial damage to the global economy, triggering an immediate clash with the US, which will likely move to open them swiftly. 

Moreover, the nation has developed more sophisticated capabilities in cyberspace and drone technology. Back in September, Saudi oil installations were severely hit by a coordinated drone and missile strike. At first, around 50% of Saudi output – and 5% of global production – was knocked down. Iranian-backed Houthi rebels in Yemen took responsibility for the attack, but many attributed it to Iran. 

Iran's threat to take revenge has already put the world on alert, and payback may be substantial.

3) Israeli elections in the mix

Israeli Prime Minister Binyamin Netanyahu has cut short his visit to Greece, and Israeli embassies all over the world have upped their security as tensions may spill beyond the US and Iran.

The startup nation has reportedly hit Iran over 100 times in Syria. Jerusalem and Tehran have also been engaged in cyber-warfare with Israel disrupting Iran's nuclear capabilities and the latter breaking into the phone of Benny Gantz, Israel's former chief of staff and PM candidate. 

The clashes have been under control in recent years and were mostly in war-torn Syria. Netanyahu is seen as risk-averse when it comes to waging unpopular wars. However, the PM – entering his twelfth consecutive year in office – is battling for his political life. Israelis will go to the polls in March for the third time in less than a year. Bibi, as the PM is known, has lost his aura as a political "magician" after failing to form a government twice.

The country's attorney general recently indicted the PM in three corruption cases that may end in a prison sentence. Only this week, Netanyahu asked the Knesset, Israel's parliament, for immunity. The public is mostly divided along the lines of either supporting Netanyahu or opposing him.

Under growing pressure, the Israeli PM may become less cautious and try to unite the country amid a growing external threat. That may trigger more bold moves in case Iran hits Israeli assets at home or abroad, adding fuel to the fire.

If Israel becomes involved, in the US-Iranian conflict – which already includes Iraq and may quickly spread to Saudi Arabia – it may cause flare-ups in many other countries, further escalating the situation. 

Conclusion and market impact

Given Suliemani's importance, Iran's capabilities, and a potential additional complication from Israel, an outright war between the US and Iran cannot be ruled out. A clash may cost many lives and may have a significant impact on the global economy. 

Markets are already on the move, with falls in global stocks and increases in safe-haven assets. Oil prices have gone beyond the September's highs, gold is nearing $1,550, and the safe-haven yen, dollar, and also Bitcoin are all on the rise.

Apart from stocks, the Australian and New Zealand dollars are under pressure. The Canadian dollar is mixed. While the loonie is a risk asset, Canada is an oil exporter, and rising petrol prices balance the flight to safety.

However, this may only be the beginning.

First, some traders are still away for New Year's, so there is room for further responses after the weekend. Secondly – and more importantly – an Iranian retaliation is yet to come. 

The current trends will likely extend. Closure of the Strait of Hormuz may send oil prices much higher. Gains in WTI and Brent may beat XAU/USD, but anything is possible. The Canadian dollar may turn into a winner, as a squeeze on oil supplies may increase demand for Canadian crude.

The safe-haven yen and dollar have more room to rise, and the Swiss franc may join them. It used to be a leader in this field and may return to its position. 

Bitcoin is a wildcard – as always. Cryptocurrencies have room to move higher, but there are additional forces driving digital assets.

More  Where next for oil and gold following Suleimani's killing