The start of 2020 has not come without incident, to say the least. The US killing of an Iranian general and Iranian missile strikes on US bases in Iraq prompted a flight to safety, with investors piling into gold, Japanese yen while pushing oil prices higher. However, each time the impact has been short lived, with markets tending to move back towards a calmer tone. What is underpinning this is the view that both sides do not want a war. Indeed Iran stated that it has ‘concluded proportionate measures’ and does not ‘see escalation or war’ while President Trump tweeted that ‘All is well’ after the Iranian missile attacks. While the risk of escalation remains high, it does appear that neither side wants to become entangled in a much deeper and prolonged situation.
As such, while markets will remain nervous, and geopolitical risks will remain elevated, the market’s worst fears (all-out war) may not play out. This leaves the backdrop of an improving economic environment and ongoing policy stimulus in place, which in turn will help provide overall support to risk assets including equities and emerging markets assets. As my last post highlighted, two major risk factors threatening to detail market sentiment into year end were also lifted. Unless there is a major escalation between the US and Iran this more sanguine tone, albeit with bouts of volatility, is likely to remain in place in the weeks ahead. This also mean that attention will eventually turn back to data releases and economic fundamentals.
In this respect the news is not so bad. Although the US ISM manufacturing index weakened further and deeper into contraction territory below 50 other data including the ISM non-manufacturing index which beat expectations coming in at , suggests that the US economy is still on a rosy path. While the consensus expectations is for US payrolls to soften to a 160k increase in December compared to 266k previously, this will still leave a high average over recent months. The Fed for its part continues to provide monetary support and liquidity via its repo operations (Quantitative easing with another name) and is unlikely to reverse rate cuts. Elsewhere globally the economic news is also improving, with data showing global economic stabilization into year end.