I ended yesterday's note with this comment:
"... remember it is just the NEXT headline that can change the tone dramatically, and that headline can go in either direction. While we don't expect any real positive headline right now, the risk remains to the downside. So just stay the course. We are solidly in the 3200/3250 trading range with support found in the 3200/3225 range. Remember, the markets today are driven by supposedly ‘smart algos' so the moves can be swift. BUT, there is plenty of support for equities..."
The NEXT headline is all it took, and the markets convulsed. At 5:30 pm (est) Tuesday, January 7th, the Iranians launched a series of 15 missiles attacks against American outposts located in Iraq, sending Asian stocks and European and US futures lower. DOW FUTURES FELL 400 POINTS, S&P'S LOST 42 POINTS, NASDAQ FUTURES GAVE UP 103 POINTS, AND THE RUSSELL LOST 18 POINTS. But that was then, now US futures are pointing higher on the open. More to come...
Rewind to Tuesday:
Stocks rallied on Tuesday morning and then they didn't, and then they rallied again, and then they didn't (again). By the end of the day, the Dow gave up 120 points, the S&P fell by 9 points, the Nasdaq lost only 3 points and the Russell gave back 5 points; all as the rhetoric remained toxic with Iran banging the drum, threatening some form of military response. This left investors to wonder whether or not the situation would escalate out of control. The issue remains: will there be more conflict in the future? And now we know that the answer here is yes. There is sure to be more conflict in the Middle-East. The question now is: What happens next?
The Iranian Revolutionary Guard claimed immediate responsibility for the attack. The Ayatollah took to "state sponsored television" and claimed it was a "crushing response" to the US attack that killed Soleimani last week. The President was briefed and we all waited to hear the extent of the damage and whether or not there were any casualties. As stocks dropped, oil surged (again) by better than 4% and gold shot through $1600/oz.
Iran takes to Twitter, the 21st Century's response to diplomacy...
"Iran took & concluded proportionate measures in self-defense under Article 51 of UN Charter targeting base from which cowardly armed attack against our citizens & senior officials were launched.
We do not seek escalation or war, but will defend ourselves against any aggression."
"All is well! Missiles launched from Iran at two military bases located in Iraq. Assessment of casualties & damages taking place now. So far, so good! We have the most powerful and well equipped military anywhere in the world, by far! I will be making a statement tomorrow morning."
(Not sure about you, but does this all seem a bit surreal? This whole twitter thing and how it is used to make announcements like this? What ever happened to "It's a BOY!" or "It's a GIRL!")?
Asian markets fell as the headlines crossed the tape: "Violence Flares in Iraq." Investors and algos reacted to surprise attack that many did not expect so quickly. Japan fell by more than 2% before ending the day down 1.57%, Japanese PM Shinzo Abe canceled his trip to the Middle-East this weekend. Hong Kong fell by 1.6% before rallying back to close down 0.83%, China lost 1.4% early on and then settled down 1.16% while the ASX gave up 0.13%.
This morning, European stocks are under pressure but are not imploding, all down about 0.5% across the board. As morning turns to afternoon, investors/traders/analysts and strategists all have a chance to assess the damage (both physical and financial). Away from this news, UK Prime Minister BoJo met with European Commission President Ursula von der Leyen telling her that the UK will not extend its transition out of the EU past December 2020 (This is not new news). In Germany, factory orders unexpectedly fell in November but no one is paying any attention to the economic data at all. The tone has been set and the focus will remain on the geo-political situation enveloping the world for the moment.
Now while US futures did implode last night, collapsing as the S&P sliced right through 3200 like a "hot knife thru butta" (Thank you Barbara Streisand). They have all managed to come back as reports of the damage and any loss of life suggested it was more "bark than bite." At 6 am Wednesday, US futures are now all in positive territory, taking back all the losses overnight and looking to move higher as it is clear that the missile strike was more for show.
The S&P has now tested 3200. In fact, we tested 3184 overnight and as news spread that there was limited damage and no loss of life, markets rallied back. US investors still not deterred by last night's action as Trump makes it very clear: "we have the most powerful and well equipped military anywhere in the world, by far!"
What is clear is that long term investors and traders are not shy about putting money to work in a nervous market, taking advantage of mispricing due to mindless algorithmic behavior and headline driven action. While the rhetoric is now expected to be "hot" again today, remember it is just the NEXT headline that can change the tone dramatically, and that headline can go in either direction. The risk remains to the downside. So just stay the course, buy some protection but don't abandon the ship.
Look for Energy (XLE), Defense (XAR) to be top performers today. I would also throw in Cybersecurity Tech names as well. Economic data includes: ADP employment report expected to show an increase of 160k jobs, but don't be fooled, that is the LAST data point anyone is paying attention to right now.
On a side note, more trouble for BA! Another 737 plane crash, this time in Tehran of all places, killing all 167 passengers aboard. BA trading lower, down $6 or 1.8% at $331/share. Just doesn't want to break $330! Let's see what they have to say today.
Oil, as noted, surged 4% up and thru $65 barrel, trading as high as $65.50 in its initial response, but has since fallen back below $63 barrel as day turned to night and then day again. Expect oil to remain a bit erratic as this story unfolds and speculation builds over what the next move is for the Americans continued talk of threats and retaliation will keep oil on edge. But not to worry, the world is awash in oil.
Gold shot higher, rising more than $40/oz on the initial reports, sending it up and thru $1600 to as high as $1610/oz before also settling back as the reports suggested that there were no casualties. Remember, the jump in gold is a direct reflection of what investors view as the "safety trade." For now, it is anyone's guess as to where it goes next. if the tone calms down, gold will retreat, but if the tone heats up, expect gold to continue the surge.
So after the news last night – I had a hard time figuring out what's for dinner – but as the markets settled down – I thought about the Steak Pizzaiola... Why not? The crushed red pepper flakes make this dish "hot" – a reflection of the rhetoric...
Steak Pizzaiola - another hearty and heart-warming meal...
You will need a couple of things: A nice rib eye, or T-bone - (about 3/4" thick), Olive oil, Oregano, garlic, onions, red and green bell peppers, can of crushed tomatoes (not puree), some red wine, salt and pepper. *crushed red pepper flakes (optional).
In a sauce pan - heat olive oil and add crushed/sliced garlic and move it around for a couple of mins until it is nice and golden... add a sliced white onion and julienned bell peppers - turn heat to medium and cover. When the onions and peppers are soft (about 5 mins) add the crushed tomatoes, oregano and *red pepper flakes. Turn heat up and bring to a quick boil then reduce heat to medium. Add red wine (about 1/2 cup) salt and pepper and let simmer and thicken up... about 10 / 12 mins.
Next - rub steaks with olive oil, salt and pepper - do not drown the steak in oil - just enough to massage the steaks and prepare them for the skillet. Heat skillet (high) and add steaks (if you have a ribbed skillet this works best) You can sear for about 4 mins then turn over and continue cooking for another 4 mins. Then add the tomato sauce to the skillet - cover and turn heat to simmer and cook for another 10 mins. This should give you a nice medium steak - If you prefer you can let simmer longer for more well done.
When done - remove steaks from skillet - slice into thick strips and arrange on plate. This should be enough to feed 4 adults. Next - stir the sauce in the skillet pan to deglaze - making sure to scrapE the pan for any bits left behind. Spoon sauce over the steak and serve immediately. Present this meal with a large mixed salad of Arugula, Boston Bib & Romaine topped with tomatoes, red onions, cucumbers - dressed in a red wine vinaigrette. For wine - enjoy a nice Brunello di Montalcino.
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