Last week, geopolitical tensions escalated as a US drone strike killed Iranian military commander Qassem Soleimani in Iraq, who is blamed for sowing instability across the Middle East by backing militant groups in Syria, Iraq, Lebanon and Yemen. Shortly thereafter, Iran promised retaliation for the attack. Later on Sunday the Iraqi parliament voted to end the presence of US forces in the country- although the vote is not legally binding, it is a strong message from Iraqi lawmakers that they want to expel the US-led coalition against ISIS, thus ceding the way for Iran to exercise even more influence in the region. All of this points to a growing risk of conflagration in the region, which has strong implications for financial markets and the global economy overall.
For starters, oil prices jumped immediately following the news of the drone strike. Brent crude settled at $68.67, a gain of 3.7% while WTI settled at $63.05 for a gain of 3%. Some analysts portend trouble for oil prices arising from Middle East tensions, while others are bearish on the impact potential Middle East conflict may have on oil prices, as the US recently became a net exporter of oil and is no longer as reliant on foreign supplies, and thus, as susceptible to supply disruptions.
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At least, that has been the case so far, but there is growing concern over potential Iranian attacks on the Strait of Hormuz, the world’s biggest oil chokepoint- a waterway connecting the Persian Gulf with the Gulf of Oman and the Arabian sea. Around 21 million barrels of oil per day flowed through it in 2018, which is about 21% of global petroleum liquids consumption. The Strait cannot easily be bypassed (there isn’t much in the way of alternative modes of crude transportation, such as pipeline capacity) making it a vulnerable target. An attack on tankers traversing the Strait could seriously disrupt global supplies, but the US does have a presence there- a Bahrain-based US Navy Fifth Fleet as well as an aircraft carrier group, bombers and antimissile battery that could counter any potential Iranian attacks.
What does this mean for stock market investors? I’ve long suspected that some type of “Black Swan” event such as the collapse of a reputable financial institution (Lehman Brothers), a terrorist attack (9/11) or an unpredictable geopolitical event would serve as the catalyst for a major stock market correction. Although the drone strike isn't it, it is certainly a reminder of the volatility these types of events can inflict upon stock prices, and the tendency investors have of dumping equities and buying gold and Treasurys as a way to “flee to safety.” There is no reason to panic just yet, but positioning into more defensive assets would be a good idea. Anyone wanting to take advantage of additional upswings in gold and oil prices may want to consider GLD, a gold ETF , and USO, one of the few energy ETFs that let’s you invest in crude oil itself (as opposed to oil companies).
Another key event to watch is the US jobs report this Friday, which will give an indication of how the economy is doing. Economists surveyed by Bloomberg expect that the economy added 166,000 jobs in December, down from 266,000 added in November.