I guess we learned yesterday what it means for Iran to retaliate against the assassination of Qassem Suleimani. At the dawn of the trading session in Hong Kong, we had heard that more than a dozen missiles were fired at US airbases in Iraq. Expectedly, there was an immediate and sharp sell-off in risk even before the Asian indices opened. The S&P futures got dumped, crude prices spiralled up in an instant reaction, and gold eclipsed the 1600 dollar mark for the first time since 2013.
However, the panic was short-lived, and markets rebounded into the late morning session. Traders and investors rather quickly came to terms with what had to happen in any case. It must have been clear from the outset that the simple threat of expelling US troops from the region was mere lip service, and it needed actual military hardware in the form of missiles for Iran to credibly respond. That there was no loss of life would have been part of the Iranian calculation, no doubt.
Despite all the outrage about Suleimani’s death, all sides are keenly aware that they are treading a fine line. Iran’s retaliation, whatever there may still be in store, has to be measured against the asymmetrical balance of military power and the fragility of the Iranian economy which would suffer greatly in case of a more direct confrontation with America. The notion that lobbing a few missiles close enough to US bases was coordinated through diplomatic channels can also not be dismissed.
Iran had to do this, if only for public show. The immense outpour of grief in Iran, as well as Iraq, testified to the previous suspicion that Suleimani was, in fact, the Iranian personification of the equivalent of America’s Joint Chief, the head of the CIA, and Vice President, let alone the quasi-adopted son of the Ayatollah. You can’t have millions of people in the streets mourning Suleimani and not do anything. A face-saving act was called for, and let’s all hope that this was it.
Iran’s media channels reported on
Twitter in the early Hong Kong afternoon that 80 US military forces had been killed and also 200 injured. If that was true, we would long have heard about it in the Western media. On the opposing end, Donald Trump confidently
tweeted that all was well and so far, so good. His speech overnight confirmed there were no casualties. No further military action by Washington was indicated. It seems we are back in propaganda war territory.
Interesting to see how others have reacted to the stand-off. Europeans may gnash their teeth since progress with the nuclear deal seems obliterated, but they kind of softly expressed their understanding of Washington’s views of Suleimani. Gulf leaders have made the impossible diplomatic split between Washington and Tehran for fear of becoming collateral damage. Saudi Arabia urged restraint. Israel is conspicuously quiet. On the other hand, it is noteworthy that no one has accused Israel of having any involvement.
Also, foreign minister Javad Zarif gave the world a glimpse of his diplomatic talent. While strongly echoing the hardliners’ battle cries as he must he carefully worded the message of Iran no longer abiding by the nuclear agreement. He did not say that Iran will exit, rather expressed a chance to re-join if sanctions were dropped, and left room for the IAEA to still continue with their inspections. Zarif even accepted an invitation to Brussels on Friday to meet with the UK, French, and German foreign ministers.
In other words, despite the grief and calls for revenge Iran knows what is at stake and plays it carefully. It appears even the Ayatollah has accepted that. If Trump can live with this conduct as it seems, there will be a real chance for tensions to be subdued and negotiations to reopen again. So, unless there is a stray attack by independent Shia militias on American lives in Iraq, which can never be ruled out, markets will be likely to take a much deeper breather and finally shake off the downside volatility, for January at least.
And let’s be honest. There is no fundamental reason for crude to trade above 70 dollars in Brent. Gold will go up as consistently proclaimed in this space but not vertically and the 1600 threshold is still a massive resistance level. 10-year Treasuries are firmly boxed into the range of 1.5-2% and will continue to boringly oscillate there. And the equities’ drive to trend higher will not abate. In fact, the pullback may have been a god-sent for all those fund managers who are trying to position for the start of the year.
