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Daily Briefing: Iran tensions ignite oil and gold

LONDON (Reuters) - Rising U.S.-Iran tensions dominated world markets at the start of the year’s first full trading week, with reverberations from Friday’s U.S. killing of powerful Iranian military commander Qassem Soleimani still affecting commodities, currencies, stocks and bonds around the globe.

Iran's Supreme Leader Ayatollah Ali Khamenei and President Hassan Rouhani pray near the coffins of Iranian Major-General Qassem Soleimani, head of the elite Quds Force, and Iraqi militia commander Abu Mahdi al-Muhandis, who were killed in an air strike at Baghdad airport, in Tehran, Iran January 6, 2020. Official Khamenei website/Handout via REUTERS

Iraq’s parliament on Sunday voted to remove all foreign troops from the country, while Iran stepped back further from its 2015 nuclear deal and said it would abandon limitations on enriching uranium.

U.S. President Trump said the U.S. has 52 targets in Iran and was prepared to hit the country in a “disproportionate manner” should any U.S. targets come under fire.

Fearful of what an escalation of military in the region and any reprisals from Tehran may do to oil supplies, Brent crude continued last week’s rise and topped $70 on Monday for the first time since September, clocking gains of up to 7% since Soleimani’s death.

Gold was the biggest ‘safe haven’ play, with spot prices rising to their highest in more than 6 years amid uncertainty about further military action.

Other traditional safety plays were more measured, with 10-year U.S. Treasury yields bouncing back from four-week lows set overnight and Japan’s yen retreating from its highest in almost 3 months against the dollar.

Many market players are looking to the impact of the attacks on Saudi oil facilities by Iran-backed militias in September for a reference and the speed with which markets unwound those safety plays is an important initial influence on trading behaviour.

Brent has not yet topped the peak of $71.95 hit back then. And while it’s up more than 20% year-on-year, it’s still down about 7% from April’s peaks. Sustained gains therefore may drag on global activity, but at these levels are unlikely to yet alter many standing world forecasts that have been revised higher on easing trade tensions.

The effect on world stock markets continues to be negative but is also seen in the light of a record-breaking surge in global equity over the yearend holiday period.

Wall St’s S&P500 lost 0.7% on Friday night, but S&P futures are only down about 0.25% overnight – with energy stocks likely to partly offset the losses due to the higher oil price.

European stock futures are down about 0.5% before the open.

In Asia, the market reaction varied from a near 2% drop in Japan’s Nikkei as it returned from holiday to trade the reaction for the first time to the outperformance of Shanghai, which ended little changed on the day.

Hong Kong and Seoul benchmarks lost almost 1% each. MSCI’s all-country world index fell about 0.25% and is now down about 0.8% from the all-time high it set just before the news of the killing early on Friday.

The combination of the military tensions and higher energy prices has seen emerging market equities underperform in general, with MSCI’s emerging market stock index losing more than 1% in its biggest one-day drop since November.

MSCI’s emerging market currency index dropped to its lowest since before the Christmas break. Regional Gulf stocks fell sharply on Sunday, with Saudi, Kuwaiti and Dubai stocks dropping between 2% and 4%, and shares of oil giant Saudi Aramco losing almost 2% to their lowest level since listing last month in a record initial public offering.

But these too have steadied on Monday. Beyond the Iranian situation, the focus of the day will be on service sector business surveys from around the world for December, although the full effects of the U.S.-China trade agreement and UK election may not yet be felt until the January surveys.

On the European corporate news front, Christmas festivities gave a boost to the British arm of Aldi, with total sales rising 7.9% in the four weeks to Dec. 24 year-on-year, driven by strong growth in beers, wines and spirits as well as its premium ranges.

Good news also for German retailers as sales across the country were up 2.1% m/m and +2.8% y/y in November, Germany’s statistics office said.

On the M&A front, Covivio Hotels signed an agreement to acquire a portfolio of eight hotels located in Rome, Florence and Venice, as well as in Nice, Prague and Budapest for €573 million including capex.

In Italy, shares of toll road operator Atlantia are under pressure after Autostrade per Italia's CEO told a local paper on Saturday that it risks going bankrupt if the government revokes its motorway licence with limited compensation.

A look at the day ahead from EMEA markets editor Mike Dolan. The views expressed are his own.

by Mike Dolan, Twitter: @reutersMikeD, editing by Ed Osmond