The tragic fires in Australia and a deadly US air strike in Iraq on Iran’s military commander, General Qasem Soleimani late last week have dominated the headlines and the latter is driving price action in financial markets, including crude oil, gold and other safe-haven assets. There was an escalation in verbal threats over the weekend between US and Iran. Iran’s leadership announced that it was abandoning the nuclear deal and has offered $80mn for US President Trump’s life who in turn has vowed disproportionate retaliation. Iraq’s government announced that it wanted foreign troops to leave the country.
The price of Brent crude, which had been broadly stable in the second half of December around $67/barrel, has shot up to $70, and the price of gold has risen to a 6-year high of $1,570/oz. The reaction in currency markets has been less dramatic. The safe-haven Japanese Yen rallied 1.2% to a 3-week high but the Swiss Franc remains largely range-bound last week. The S&P 500, which had consistently hit new record highs, including on the first trading day of the New Year, was down only 0.7% on Friday but implied equity market volatility has shot up.
The Australian and Kiwi Dollars weakened only 0.3% and 0.5%, respectively, last week but markets are pricing a 50% probability of the RBA cutting its policy rate 25bp at its February policy meeting.
The Dollar had a week of two-halves. It weakened 0.8% in the last week of December, in trade-weighted terms, as markets turned to riskier assets, but has clawed back half of its losses in 2020. Markets seem to have largely ignored the release of yet another weak US ISM manufacturing print. The index of economic activity in the manufacturing sector fell to a new multi-year low of 47.2 December.
The Euro was broadly unchanged last week while Sterling had a choppy week, ending up about 0.3%.
