Risk assets have traded higher across the board so far this week as traders respond to the increasing tensions between the US and Iran. The only exemption is the equities markets as policymakers toned down expectations for aggressive easing.
On Monday, president Trump announced a fresh wave of “hard-hitting” sanctions. This time, their exclusive aim is to negatively impact Iran’s supreme leader Ali Khamenei.
The sanctions are designed to restrict the supreme leader, his office, as well as his closest associates, from accessing key capital resources.
Trump Announces Fresh Sanctions
Commenting on the new sanctions, President Trump said:
“These measures represent a strong and proportionate response to Iran’s increasingly provocative actions… We do not seek conflict with Iran or any other country… I can only tell you we cannot ever let Iran have a nuclear weapon.”
Senior Iranian Figures Targeted
A statement released by the US Treasury explained that the new sanctions target eight senior naval commanders. They also target key aerospace and ground force personnel. The statement said:
“These commanders sit atop a bureaucracy that supervises the IRGC’s malicious regional activities, including its provocative ballistic missile program, harassment, and sabotage of commercial vessels in international waters, and its destabilizing presence in Syria.”
The initial reaction from Iran has been one of outrage. Majid Takht-Ravanchi, the Iranian ambassador to the UN said:
“No one in clear mind can have a dialogue with somebody who is threatening you with sanctions. As long as that is still there, there is no way we can have a dialogue.”
Iranian President Insults Trump
Tensions increased further as Iranian president Hassan Rouhani claimed that Trump suffered a “mental disorder.”
He described the sanctions as “outrageous and idiotic” given that the supreme leader, who is in his 80s, has no overseas assets nor intentions to travel to the US.
However, US secretary of state Mike Pompeo told reporters:
“The supreme leader’s office has enriched itself at the expense of the Iranian people… It sits atop a vast network of tyranny and corruption that deprives the Iranian people of the freedom and opportunity they deserve.”
Military Action Still A Threat
These sanctions come in the aftermath of Trump calling back an airstrike that he had ordered last week.However, the prospect of military action in the future is still very real with Trump saying:
“I think a lot of restraint has been shown by us, and that doesn’t mean we’re going to show it in the future,”
The President also threatened Iran with “obliteration” in response to the Iranian President’s comments made after Monday’s imposition. The sanctions seem retaliatory rather than compliance related.
Iran did threaten to breach the production limit for Uranium last month though, but only to persuade other countries amid the impact of earlier US sanctions. Still, this shouldn’t provoke the US to impose sanctions, nor should a drone shootdown be the equivalent to war.
But the situation worsens day in day out as Trump seems to be shifting his focus away from trade wars, and onto a real catastrophic war!
Market Reaction
SPX500
Equities prices have started to come off a little this week. Following an earlier surge to fresh all-time highs in the SPX500 last week, fuelled by a dovish FOMC meeting, we’ve seen price dipping back below the prior 2958.68 level high. With the US economy already under the strain of the softening trade war with China and the prospect of a military conflict becoming more alarming for markets, volatility increases.
Despite the focus of the likelihood of further Fed easing being taken off for a while, which had been supporting prices earlier, James Bullard’s comments on a non-aggressive easing only on Wednesday pushed prices a tad lower. Despite being bullish today, SPX is likely to end the week on the negative.
Below here, the next big support level is the broken 2018 high of 28.78.66. If held, it should keep focus on a continued push higher. Below there, the next major structural support is back down at the 2817.26 level, which would represent a disappointing reversal for bulls.
USOIL
Crude prices have been supported as a result of the increase in tensions. Conflict in the Middle East has typically kept oil well bid on expectations of supply disruptions and crude is now back above the 57.34 level. The next topside level to watch is the 60.01 zone where we have previous structure, offering resistance, as well as the bearish trend line from 2019 highs. A break back above this zone would put focus on a move back up to 63.72 next. It is still not clear if Wednesday’s price action ‘tagged’ the $60/barrel level.
