EC Will US-Iran Geopolitical Risk Upend Global Markets?

The trading week begins with a spike in uncertainty following last week’s US airstrike that killed Qassem Soleimani, Iran’s top military official. Although most of the major asset classes posted gains last week and still reflect across-the-board profits for the one-year trend, repricing risk has become substantially more challenging – and critical.

Processing the blowback risk will take time, in part because there are multiple fronts to consider. From a strategic perspective, for instance, there are questions of how the US Middle East strategy fares. It’s fair to say that there are many more questions about how the Trump administration moves forward.

Last week’s airstrike “unquestionably made an already volatile situation much more dangerous,” warns retired Army Lieutenant Colonel Daniel Davis, a senior fellow at Defense Priorities. “If you paid any attention to Iran in the last 40 years you know they will never buckle to that kind of pressure. It’s just the opposite.”

Reflecting the sudden shift in geopolitical assessments, stock markets have turned to a risk-off bias while oil and gold are among the beneficiaries. “The threat is that lingering uncertainty about future conflict will add a security premium to the price of oil,” predicts Michael Lynch, president of Strategic Energy & Economic Research.

Greg Valliere, chief U.S. policy strategist at AGF Investments says the Trump administration’s decision to take out Soleimani is a “game changer that will obscure everything else.”

Perhaps, although no one really knows what the extent of any blowback will be at this point and so the case for extreme portfolio shifts at this point is premature. On that note, let’s review where the major asset classes stand through the close of trading on Friday (Jan. 3), based on a set of ETFs.

Last week’s top performer: inflation-indexed Treasuries via iShares TIPS Bond (TIP). The fund jumped 0.9%, rising to a record high.

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