Iran Tensions and Buying Opportunities
Over the last several sessions, there has been noise in the markets when it comes to the US-Iranian tensions. After the United States killed General Soleimani, there have been concerns relating to a potential Middle East conflict. However, as the last couple of days have shown, the Iranians are willing to take their time to react.
Having said that, markets do tend to overreact to these situations, and an attempt to turn things around can already be observed within the financial markets.
Oil markets
Oil market have rallied after the airstrike, but the reality is they aren’t exactly exploding to the upside. The reason for this is simple: The United States has the ability to pump out more oil. Shale producers love these high pricing situations, and the closer that oil gets to $70, the closer we are to seeing even more fracking to flood the market.
There was a time in the past when the Iranians would wreak havoc on the world’s oil markets, but it’s a limited weapon these days. If the Iranians do something to disrupt the world’s oil supply, it could cause major issues for multiple nations, but the United States won’t be one of them. In other words, it’s a very limited weapon. In fact, they would be putting money in Uncle Sam’s pocket if they did.
Attacking Israel
Attacking Israel is something the Iranians have threatened, but this will only invoke the wrath of both the Israelis and the United States. It is very unlikely that the rest of the Gulf nations are willing to jump in and come to the defense of the Iranians if that happens. While they have already warned about an Israel offensive, actually doing so is a completely different matter.
Attacking US interests
This is perhaps likely to be a continued threat. However, as we have seen with the rocket attacks on the US bases, the ability to cause serious damage will be limited.
Also, if the Iranians were to cause any serious damage, the retaliation would certainly be much larger, with the possibility of something along the lines of a cruise missile attack being the most likely scenario.
The attacks have just received an “all is well” Tweet from Trump. The initial reaction in the oil markets was to see a major spike, but almost all of that price gain was given back up immediately. This is based on the fact that there are plenty of sources of oil beyond Iran’s reach.
Financial markets
Financial markets will continue to be rather noisy, and this will probably keep driving money into gold. However, stock markets seem to be taking this in stride because the biggest concern with the Iranians will be whether or not they can limit energy supply.
Because of this, financial markets have already started to recover a bit, considering that the market participants are aware of the limited ability of Iranians to cause issues. When they do retaliate, it will probably be a buying opportunity for risk assets as there will be a “knee-jerk reaction”. However, the reaction will be due to algorithmic trading more than anything else. Those machines get turned off in times like these because they tend to cause massive losses.
Look at anything Iran does as a possible buying opportunity once the dust settles. Iran cannot afford a full war with the Americans, and it certainly knows this. Tension should simmer back down over the course of the next few weeks. Having said that, there will be some type of reaction by Iran to save face. Look at that as a buying opportunity.