Oil prices surged as much as $3 a barrel as gold, the yen and safe-haven bonds all rallied on Friday after the U.S. killing of Iran’s top military commander in an air strike in Iraq ratcheted up tensions between Washington and Tehran.
Traders were spooked after the death of Major General Qassem Soleimani, head of the elite Quds Force who was also one of Iran’s most influential figures, and by Iranian Supreme Leader Ayatollah Ali Khamenei’s vow of revenge.
U.S. Secretary of State Mike Pompeo said the strike aimed to disrupt an “imminent attack” that would have endangered Americans in the Middle East.
Oil markets saw the most dramatic moves, with Brent crude futures leaping as much 4.5 per cent to $69.20 a barrel, the highest since Saudi crude facilities were attacked in September.
The impact hit almost every asset class.
Europe’s broad STOXX 600 index fell as much as 1 per cent and shares on Wall Street almost the same as New Year optimism, which had pushed equity markets to new records, evaporated.
The yen rose half a percent against the dollar to a two-month high, the Swiss franc hit its highest against the euro since September and gold prices climbed to a four-month peak, racing past the key $1,550 an ounce level.
“Geopolitics has come back to the table, and this is something that could have major cross-asset implications,” said Salman Ahmed, Lombard Odier’s chief investment strategist.
“What is critical is how it pans out in the next few days,” Ahmed said. “Whether it turns into a theme depends on Iran’s reaction and then the U.S. response.”
Iran promised harsh revenge. Soleimani’s Quds Force and its paramilitary proxies have ample means to mount a response.
In September, U.S. officials blamed Iran for attacking the oil installations of Saudi Aramco, the state energy giant and the world’s largest oil exporter. Iran has denied responsibility for the strikes and accused Washington of war-mongering.
The Trump administration then did not respond, beyond heated rhetoric and threats, and markets settled down within a week after Brent surged 14.6 per cent, its biggest one-day percentage gain since at least 1988.
The U.S. government and others on Friday urged their citizens in the region either to return home or to stay away from potential targets and public gatherings.
President Hassan Rouhani said the killing would stiffen Iran’s resistance to the United States.
Pompeo said in a round of TV interviews that the United States remained committed to de-escalation with Iran but that it had needed to defend itself.
“He (Soleimani) was actively plotting in the region to take actions - a big action as he described it - that would have put dozens if not hundreds of American lives at risk. We know it was imminent,” Pompeo told CNN.
MSCI’s gauge of stocks across the globe shed 0.36 per cent, while its emerging markets index lost 0.37 per cent.
Canada’s main stock index also fell on Friday.
The energy sector was among the few bright spots, climbing 0.8 per cent, as fears of disruption to Middle East oil supplies boosted crude prices.
The Toronto Stock Exchange’s S&P/TSX composite index was unofficially down 33.83 points, or 0.2 per cent, at 17,066.12.
The materials sector, which includes precious and base metals miners and fertilizer companies, slid 1 per cent.
Leading the index were MEG Energy Corp., up 3.9 per cent, Baytex Energy Corp., up 3.5 per cent, and ARC Resources Ltd., higher by 2.8 per cent.
Lagging shares were First Quantum Minerals Ltd., down 6.1 per cent, Hudbay Minerals Inc., down 5.2 per cent, and Hexo Corp., lower by 4.4 per cent.
The Canadian dollar edged lower against its U.S. counterpart on Friday, paring some of this week’s rally as rising geopolitical tensions in the Middle East weighed on risk appetite.
The Canadian dollar was trading 0.1 per cent lower at 1.2994 to the greenback, or 76.96 U.S. cents. The currency, which notched a 14-month high on Tuesday at 1.2952, traded in a range of 1.2961 to 1.3005.
For the week, it was up 0.7 per cent.
“It’s going to be difficult for Canada to make headway, at least in the current risk-off environment,” said Michael Goshko, corporate risk manager at Western Union Business Solutions. “Tensions in the Middle East are never good for risk, or for trade.”
Stocks on Wall Street opened down 1 per cent, the lowest point of the session as losses were pared during the session.
The Dow Jones Industrial Average fell 235.48 points, or 0.82 per cent, to 28,633.32, the S&P 500 lost 23.2 points, or 0.71 per cent, to 3,234.65 and the Nasdaq Composite dropped 71.42 points, or 0.79 per cent, to 9,020.77.
The global gauge and Wall Street indices set record closing highs on Thursday, extending the year-end rally in equities into 2020.
Brent hit a peak of $69.50 a barrel, its highest since mid-September, though it later pared some losses to settle $2.35 higher at $68.60.
West Texas Intermediate (WTI) crude rose $1.87 to settle at $63.05 a barrel, after earlier spiking to $64.09 a barrel, its highest since April 2019.
Yields on German Bunds and U.S. Treasuries - the world’s benchmark government bonds that are typically seen as the safest assets - fell sharply.
The 10-year Bund yield fell 7 basis points to a two-week low of -0.299 per cent, while Bund futures were up 0.58 percent, at 172.26 euros.
Benchmark 10-year Treasury notes rose 26/32 in price to yield 1.7916 per cent, from 1.882 per cent late on Monday.
Spot gold prices hit a high of $1,553.20 an ounce. U.S. gold futures settled 1.5 per cent higher at $1,552.40.
The dollar index rose 0.01 per cent, with the euro down 0.04 per cent to $1.1166. The Japanese yen strengthened 0.51 per cent versus the greenback at 108.03 per dollar.
The focus on geopolitics meant markets paid little attention to stronger-than-expected data from France, where inflation rose 1.6 per cent year-on-year in December, beating analysts’ expectations for a 1.4 per cent rise.
German inflation figures were also higher, although unemployment in Europe’s largest economy rose more than expected.
The U.S. manufacturing sector contracted in December by the most in more than a decade, with order volumes crashing to near an 11-year low and factory employment falling for a fifth straight month, the Institute for Supply Management said.
Reuters