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Iranian Retaliation Threat Likely to Encourage Investors to Trim Stock Market Exposure

James Hyerczyk

Volatility moved to the forefront on Friday with “risk-off” the theme after U.S. air strikes in Iraq killed a top Iranian commander, heightening geopolitical tensions. Investors still aren’t sure what impact the U.S. air strikes could have on the financial markets, but they are not taking any chances by taking early protection in the stock markets, crude oil market and safe-haven assets.

Most investors seem to agree that the next major move in the markets hinges on what the Iran government does in terms of retaliation.

Iraqi TV:  Iranian Military Commander General Soleimani Killed in Baghdad Strike

Early Friday, an official with an Iran-backed paramilitary force said that seven people were killed by a missile fired at Baghdad International Airport, blaming the United States. It was not immediately clear who fired the missile or rockets or who was targeted. There was no immediate comment from the U.S.

Their deaths are a potential turning point in the Middle East and are expected to draw severe retaliation from Iran and the forces it backs in the Middle East against Israel and American interests.

U.S. Sees Signs Iran or Proxies May Be Planning More Attacks:  Pentagon Chief

Even before the early Friday airstrikes by the United States, officials were on guard even if investors chose to ignore the warnings by posting record highs during Thursday’s session. However, it looks as if gold investors got it right.

Hedge funds had been accumulating gold for about two months before last week’s breakout rally. The chatter in the markets had gold investors buying gold as a bet against the stock market sustaining the current record rally.

The warning from U.S. officials was probably ignored by most investors since the major business websites would rather promote the markets touching record highs than potential threats to the rally that could encourage investors to seek protection.

On Thursday, U.S. Defense Mark Esper said on Thursday there were indications Iran or forces it backs may be planning additional attacks, warning that the “game has changed” and it was possible the United States might have to take preemptive action to protect American lives.

“There are some indications out there that they may be planning additional attacks, that is nothing new … we’ve seen this for two or three months now,” Esper told reporters, without providing evidence or details about U.S. assessment.

“If that happens then we will act and by the way, if we get word of attacks or some type indication, we will take preemptive action as well to protect American forces to protect American lives.”

More What Ifs

If investors start to price in the possibility of retaliation from Iran then the upside momentum will slow. Investors could also trim exposure in the markets but by what percentage. Remember, there were NO 10% corrections in the market last year. Furthermore, analysts had been predicting single percentage gains in 2020 even before the escalation of Middle East Tensions.

Finally, China is allied with Iran. What if, they decide to postpone the signing of the trade deal next week? They may say it’s a translation issue and that they want to cross their “t’s” and dot their ‘I’s”. But they may want to send a message to the United States to back-off Iran. Remember, they are also still upset about the U.S. involvement in Hong Kong.

This article was originally posted on FX Empire

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