US equity futures tumbled on Wednesday morning in response to Iran’s retaliation against US in rocket attacks on two Iraq bases. The S&P 500 index future lost almost 1.5%, breaking down a key support level at 3,200 points.
Asian equity markets are likely to follow US futures lower, as investors flee away from risk assets into safe havens.
The abrupt re-escalation of geopolitical tensions led to the gold price surging to a seven-year high of $1,605, as fears of uncertainty boosted demand for safety. Technically, however, it seems that gold has been severely overbought and may be subject to a pullback if sentiment recovers on positive developments. Right now, all traders are eyeing the White House’s response to Iran’s attack on US bases in Iraq and President Trump’s decision will be key to financial markets.
Similarly, safe-haven currencies JPY and CHF rallied against the USD, showing a clear sign of ‘risk off’. In contrast, AUD, NZD, SEK were among the worst performing G10 currencies.
The Brent crude oil price, a key commodity sitting in the centre of the Middle East tensions, opened 4.2% higher this morning to $72.1. As mentioned before, US-Iran tensions put the safety of the Strait of Hormuz at high risk. Situated between Iran and Oman, the Straits of Hormuz is a strategically important crude oil gateway that links Middle East crude oil production to the rest of the world.
Besides geopolitical turmoil, macro data continued to deliver positive results that show economic expansion. The US non-manufacturing PMI Index climbed to its four-month high of 50.0. The reading was higher than November’s number of 53.9 and beat market expectations of 54.5. It suggests that businesses felt relieved by a partial trade deal between the US and China, and service sentiment continued to improve. The US dollar index climbed higher to 96.5.
In Asia, trading sentiment might be dampened by the headline news, which looks far more severe than the fundamental impact. Thus, this round of selloff may create bargain hunting opportunities in the regions and markets that have little business to do with Iran and Iraq. Such markets includes China, HK and Singapore.
Sector wise, crude oil, gold and national defence-related industries may get a temporary boost in their share prices. Rising crude oil price may lead to a fall in the currency of countries which rely heavily on oil imports, such as China, India and South Korea.
Gold - Cash chart
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Margaret Yang Yan