Oil soars, stocks sink as U.S. airstrike in Baghdad shatters market calm
The risk-on sentiment that ushered in the new year came to an abrupt end on Friday as tensions between the U.S. and Iran escalated, sinking American equity futures with stocks and buoying haven assets including gold, the yen and Treasuries. Oil surged.
Contracts for all three of the main U.S. gauges slumped after an American airstrike in Baghdad killed a top Iranian commander and the Middle Eastern country’s leader threatened “severe retaliation.” The VIX Index, a measure of expected equity price swings, jumped the most on a closing basis since August. The Stoxx Europe 600 Index also slid, though energy companies bucked the retreat after West Texas oil rallied more than 4 per cent.
Oil prices jumped more than US$3 on Friday after a U.S. air strike in Baghdad ordered by President Donald Trump killed the head of Iran’s elite Quds Force, sparking concerns for an escalation of regional tensions and disruption to crude supplies.
Brent crude rose as high as US$69.50 a barrel, its highest since mid-September when Saudi oil facilities were attacked, and was up 4.2 per cent or $2.83 a barrel at US$69.08 by 1058 GMT. West Texas Intermediate (WTI) crude was up $2.53 or 4.1 per cent at US$63.71 a barrel, having earlier spiked to $64.09 a barrel, its highest since April 2019.
An air strike at the Baghdad Airport early on Friday killed Major-General Qassem Soleimani, the architect of Iran’s spreading military influence in the Middle East and a hero among many Iranians and Shi’ites in the region.
Iran’s Supreme Leader Ayatollah Ali Khamenei said harsh revenge awaited the “criminals” who killed Soleimani.
“We expect moderate to low-level clashes to last for at least a month and likely be confined to Iraq,” Eurasia’s Iran analyst Henry Rome said.
“Iran will also likely resume harassment of commercial shipping in the Gulf, and may launch military exercises to temporarily disrupt shipping,” he said.
Most shares in Asia reversed or erased gains and the yen strengthened, though equities in Japan remain shut for a holiday. Gold hit the highest in four months and the yield on 10-year Treasuries looked poised for the biggest drop in three weeks as government bonds globally rallied. Data showing German unemployment increased by more than forecast compounded the cautious mood in Europe, and the euro extended losses as the DAX Index led equity declines.
The developments derailed a bullish mood that pushed the S&P 500 to a record high Thursday. Traders had returned from holidays to the news that China’s central bank had moved to support the economy and President Donald Trump expected to sign the first phase of a trade deal with the Asian nation on Jan. 15. Beijing has yet to confirm the date.
The flare-up could “dash market hopes for a rebound of the global economy that is still to emerge from under the cloud of the U.S.-China trade war,” said Valentin Marinov, the London-based head of G-10 currency research at Credit Agricole SA. “Risk sentiment should remain fragile also because central banks may be slow to respond or simply no longer have the arsenal to respond in an adequate way.”
A gauge of developing-nation stocks joined the sell-off, though most equity markets in the Middle East are closed for the weekend.
These are the moves in major markets:
Futures on the S&P 500 Index sank 1.3 per cent as of 6:11 a.m. New York time. The Stoxx Europe 600 Index decreased 0.9 per cent. The MSCI Asia Pacific Index fell 0.1 per cent.
The Bloomberg Dollar Spot Index jumped 0.3 per cent. The euro declined 0.4 per cent to $1.1129. The British pound declined 0.6 per cent to $1.3069. The Japanese yen increased 0.4 per cent to 108.10 per dollar.
The yield on 10-year Treasuries fell six basis points to 1.81 per cent.Germany’s 10-year yield dipped seven basis points to -0.29 per cent.Britain’s 10-year yield fell six basis points to 0.733 per cent.
West Texas Intermediate crude surged 4.3 per cent to $63.79 a barrel.Gold jumped 1.2 per cent to $1,548.24 an ounce.