LONDON (Reuters) - Much like the response to September’s attack on Saudi oil facilities, world markets are quickly moderating their initial reaction to last week’s U.S.-Iran tensions.
While few financial traders profess any foresight about what happens next in the region, the assessment of the first few days since the U.S. killing of Iranian military leader Qassem Soleimani is that the reactions and fallout are unlikely to lead to an immediate head-to-head conflict between the United States and Iran – however much of a long-term risk it poses for the stability of the region.
While hundreds of thousands of Iranians continue to mourn Soleimani, overnight reports of a U.S. troop withdrawal from Iraq were denied by Washington, even though Iraq’s parliament demanded such a move on Sunday.
Troops may be pulled out of the capital, Baghdad, however. The question of where and how Iran will retaliate will keep headline risk high for markets, as will longer-term concerns over how it pursues its nuclear programme. But just four days on, there’s some relief there’s been no immediate backlash.
Brent crude oil prices have more than halved their 7% gains since Friday’s killing, retreating briefly back below $68 overnight before settling about $68.50 into the European open.
For context, prices never breached the September peak just shy of $72 following the Saudi attacks and are now up a net 3% since Friday.
That apparent easing of energy market tensions has rippled across assets prices, too.
Wall Street’s S&P500 rallied yesterday, closing 0.35% higher on the day and just 0.3% from Thursday’s all-time high.
The ViX equity volatility gauge, which never breached December’s highs during the initial reactions, subsided back below 14%.
S&P stock futures were up 0.2% early on Tuesday.
Other safety plays also unwound.
Japan’s yen retreated from near three-month highs, U.S. Treasury yields recaptured 1.8% and gold prices slipped back from six-year highs.
In Asia, Tokyo’s Nikkei rebounded more than 1% and Seoul’s Kospi gained almost 1%. Shanghai and Hong Kong stocks were higher, with European stocks expected to open up about 0.5%.
China’s offshore yuan strengthened past 6.94 per dollar for the first time since Dec 13. Emerging markets, which had been hurt most by the tension and oil price spike, recovered. Separately, readings from service-sector surveys from around the world on Monday were relatively upbeat.
The easing of U.S.-China trade tensions and success of Federal Reserve liquidity operations to prevent year-end problems in the money markets encouraged markets.
U.S. November trade data and ISM service sector surveys will be watched later.
Euro/dollar was lower before the release of flash euro zone inflation numbers for December.
Spain’s Socialist leader Pedro Sanchez is expected to be confirmed as head of a left-wing coalition in a parliamentary vote, ending months of political deadlock.
The move has largely been priced in by markets and the Spain/German yield spread has been little changed around 65 bps.
In European corporate news, Aston Martin is expected to tall up to 25% at the open after issuing a profit warning.
Banking stocks will be closely watched after UBS announced a restructuring of its wealth management unit.
Pre-market indications suggest the Swiss bank will make solid gains at the open.
SocGen’s chief executive told the FT that his bank wants to take part in an incoming consolidation.
Investors might decide it’s time to reconsider the unloved sector if M&A and cost cutting can offset lower rates and tough regulations.
Despite reporting lower sales, Britain’s Morrison could gainif they prove less disappointing than feared.
A look at the day ahead from EMEA markets editor Mike Dolan. The views expressed are his own.
Editing by Larry King