Markets remain on red alert. There is a sense we have not seen the back of the conflict in the Persian Gulf.
In a denouement to the events that took place some twenty-seven hours, when Iran retaliated to the US assassination of Iran’s top general Qassem Soleimani with direct military action against US interests, firing over 12 missiles at the Ayn al Asad Iraqi armed and United States armed forces base, located in western Iraq, a risk on rally ensued.
Crucially, the lack of American casualties provided an opening for Donald Trump to reduce tensions. The de-escalation was sending US yields, gold and USD/JPY back to pre-missile launch levels. Indeed, the US and Iran have stepped back from the brink — for now.
"Yet even if outright war has been avoided, the road ahead remains hazardous," The Financial Times argues.
The article, which was written overnight, warns that Iran’s response to the US attack underlines its capacity for careful calculation:
"Direct action by the Iranian military," the article says, was, "calibrated to meet the need for Tehran to answer the Soleimani killing while lessening the risk of a devastating American response."
"Even if the US holds back from further military action, however, calm will not return any time soon. The original trigger for the tit-for-tat violence — Mr Trump’s unilateral withdrawal from the Iran nuclear deal and campaign of “maximum pressure” on Tehran to renegotiate it — has not been removed. The US president vowed on Wednesday that “Iran will never be allowed to have a nuclear weapon”."
"Tehran is likely to respond to further tightening of the noose of US sanctions by ramping up its asymmetrical warfare, via regional proxies, against the US and its allies."
"Tehran will also not end its attempts to roll back America’s presence in the Middle East. Iranian President Hassan Rouhani insisted that Iran’s “final answer” to Soleimani’s killing would be to “kick all US forces out of the region”."
"There is a real threat that US troops could be expelled from Iraq."
"Powerful Iranian-backed factions will seek to exploit the anti-American sentiment to push for a US exit. That would further strengthen Iran’s hold on Iraq, and risk a resurgence of Isis in the country.
"Mr Trump urged other signatories — the UK, France, Germany, Russia and China — to break away from the “remnants” of the nuclear deal. They should instead stay in the middle ground, stepping up efforts to find a negotiated solution."
"The only way to reduce the risks of a Middle East conflagration is to resolve the issue of Iran’s nuclear ambitions through diplomacy. The events of the past few days may only have made that more difficult."
Risk-FX is not out of the woods yet. Gold, AUD/JPY, USD/JPY will all be subject to volatility in the year ahead as investors endure the conflicts in the Middle East. We have already had a minor scare in Asia today, with reports of missiles lighting up the green zone of Baghdad:
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