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Daily Briefing: Plunge and bounce on Iran reprisals

LONDON (Reuters) - In the language of the moment, the market response to the latest attacks in the Gulf seems proportionate, and investors remain wary of escalating the portfolio implications. Iran’s much-anticipated reprisals for last week’s U.S. killing of its top general, Qassem Soleimani, involved missile attacks on U.S. bases in Iraq late last night.

A woman holds a picture of late Iranian Major-General Qassem Soleimani, as they celebrate in the street after Iran launched missiles at U.S.-led forces in Iraq, in Tehran, Iran, January 8, 2020. Nazanin Tabatabaee/WANA (West Asia News Agency) via REUTERS

The initial market reaction to the news was a reprise of Friday’s moves, but the speed of the price reversals was doubly quick and equally sharp after U.S. President Donald Trump tweeted that “all was well” and Iran’s foreign minister said the attacks were a direct but proportionate response to Soleimani’s death.

Iran’s Supreme leader, Ali Khamenei, said on Wednesday that U.S. troops should leave the region.

Brent crude oil climbed as high as $71.75 after the initial news of the missile strikes but again failed to breach the highs set in mid-September after attacks on Saudi oil facilities. It quickly fell back below $70 to settle around Monday’s close of $68.90 into the London open.

Similarly, Japan’s safe-haven yen initially jumped to its strongest in three months at 107.71 yen per dollar, but fell back as to trade at 108.40 into London trading.

U.S. Treasury yields also plunged and then rebounded.

Asia’s main stock markets reversed Tuesday’s gains, but little more.

Shanghai, Hong Kong and Seoul were all down about 1% and Japan’s Nikkei down about 1.6%. Australia’s shares outperforming with losses of just 0.1%.

U.S. S&P 500 futures were also down just 0.1% and European stock futures 0.6%.

The dollar was higher against major and emerging currencies, although euro/dollar held up above $1.1150 despite another set of disappointing German industrial readings.

Markets in the Middle East weakened, with Dubai stocks tumbling 1.2% and Saudi Aramco down 0.6% to a new low, matching a decline in the Saudi Tadawul index.

Market strategists reckon the initial Iranian response was predictable and didn’t appear aimed at civilians or oil facilities.

The apparent lack of major U.S. casualties and Trump’s relatively muted response also appeared to take heat out of the situation, although a formal statement from Trump later will now be awaited to see if Washington is considering a tit-for-tat response.

The crash of a Ukrainian airliner in Tehran overnight added to the tension, but Kyiv and Tehran officials insisted it was an accident, not a consequence of military action. Clearly, headline risk has risen and day-to-day volatility may climb, but markets are not yet running for the bunkers.

Elsewhere, sterling gained before a meeting later on Wednesday between UK PM Boris Johnson, EU Commission President Ursula von der Leyen and EU Brexit negotiator Michel Barnier on post-Brexit trade talks.

Minutes for the December Riksbank meeting that ended Sweden’s negative rates policy are also due out.

Data of interest include a final reading on euro zone consumer confidence and the ADP National Employment numbers in the United States.

In corporate news, airlines stocks are expected to be under pressure, not only because military strikes push oil prices up but also because of the Ukrainian airliner crash. Sainsbury's shares slipped 0.2% after reporting a small decline in underlying sales during the Christmas quarter.

Baker and takeaway food group Greggs said its annual profit would be higher than expected and it would pay staff a bonus to reflect an "exceptional year" - but its stock fell 1%.

FINABLR's shares fell 12% as the company's foreign exchange firm, Travelex, confirmed that a software virus that forced it to take its systems offline at the end of December was a ransomware known as Sodinokibi.

Two investors are selling shares worth 374 million pounds ($490 million) in NMC Health, a bookrunner for the deal said on Tuesday, weeks after short-selling firm Muddy Waters questioned the company’s finances.

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

Editing by Larry King