Risk assets are rising, despite an inevitable retaliation from Iran as markets anticipate intensifying proxy wars in the Middle East region. US stocks appear bulletproof after recovering most of the decline from the assassination of Iran’s top commander. The world seems to be confident for now that a tit-for-tat retaliation game of ping-pong will not derail the bullish outlook for global equities. Central banks remain accommodative, deflationary pressures will limit any tightening in monetary policy and economic growth prospects are improving.
The dollar is slightly firmer against all of its major trading partners as investors turn cautiously optimistic the situation in the Middle East will not blow up. FX trade seems set for tight ranges until the global reacceleration gathers steam. If we only see regional proxy wars in the Middle East, we could see limited demand for Treasuries, thus painting a picture for the European currencies to gain momentum this quarter.
Oil markets are realizing that we probably will not see an all-out war in the Middle East and that patience is needed in waiting for Iran’s response to the assassination of their powerful military general. No one on either side wants a war and we will likely see proxy wars spur up in Iraq, Saudi Arabia, and Yemen.
Oil prices could continue to pullback here as the US-Iran standoff appears headed to a messy long-drawn out conflict and not an all-out war. If WTI crude erases all of last week’s geopolitical risk surge and breaks below the $61.50 level, we should limited downside as inventories are still showing signs of tightness and the demand outlook is continuing to improve.
Gold prices have eased after global equities recover as markets shrug off geopolitical risks in the Middle East. The macro-economic global outlook is still vulnerable, and today’s cautious optimism is likely to be somewhat short-lived. Unless the US sees a meaningful de-escalation with Iran and if US stocks continue to make fresh record highs over the coming weeks, gold prices should have a clear trajectory towards the $1,640 an ounce level. Gold could also be supported since US equities could lose a little of their mojo if the upcoming earnings season targets only low-to-mid single digit growth this year.
Bitcoin continues to climb higher along with the entire crypto space as investors grow optimistic a key bottom has been put in place. Bitcoin’s recent rise is not on strong volume and may only be sustained if we see price stabilize above the $8,300 level. Volatility should grow for the entire crypto universe, but the risks are still to the downside for Bitcoin. Etherium and XRP are also having their day in the sun and should see their gains mostly track Bitcoin.