ANALYSIS: Missile attack by Iran leaves markets pondering Trump's next move

LATEST: Overnight, Iran launched over a dozen ballistic missiles at two Iraqi air bases – Al-Asad and Erbil - which houses US and coalition troops. There were no reported US casualties thus far and the situation is being assessed, but sources noted casualties among the Iraqis at the Al-Asad airbase following the attacks. The rockets fired near Erbil in Iraq have reportedly hit empty fields. Iranian state TV claimed that 80 Americans were killed in the Iranian attack on US targets in Iraq, adds that US helicopters and military equipment were severely damaged in the attack; however, this has not been confirmed by the US

IRANIAN RESPONSE: Iranian Revolutionary Guard Corp claimed responsibility for the attacks and warned allied countries of the US "that if attacks are launched from bases in their countries on Iran, they will be a target of military retaliation.". Iran also threatened "more crushing attacks", including further attacks to US bases should the US respond with fresh attacks. Furthermore, Iranian Foreign Minister Zarif tweets "We do not seek escalation or war, but will defend ourselves against any aggression".

US RESPONSE: The US Pentagon noted that Iran launched over a dozen ballistic missiles against US military and coalition forces in Iraq and will take all necessary measures to protect US personnel and allies. Thereafter, US President Trump tweeted "all is well" whilst acknowledging the missile launches, adding that "Assessment of casualties & damages taking place now. So far, so good!".

MARKET RESPONSE: In an immediate reaction to the attacks, E-mini S&P future fell from around 3225 to a low of 3181, USD/JPY fell to 107.66 from 108.35, spot gold rose from around USD 1578/oz to breach USD 1600/oz for the fist time since April 2013, printing a high just above USD 1610/oz. Brent front-month futures immediately spiked higher at the open from USD 68.50/bbl to USD 71.75/bbl. However, amid the lack of immediate retaliation from the US, a bulk of the moves above were eventually pared as markets await today’s statement from US President Trump (time TBC). For energy markets specifically, OPEC Sec Gen Barkindo was quite to downplay the impact of the attacks by noting that he expects no supply disruptions from Iraq with spare capacity running at around 3-3.5mln bpd. This followed on from comments via the UAE Energy Minster Mazrouei, that the oil market is sufficiently supplied to weather the storm.

WHAT NEXT?: The next focus for traders will be on what response the attacks will evoke from the US. US President Trump is set to issue a statement today; no time for this has been announced yet (Trump is set to receive an intelligence briefing at 1915GMT). The response by the US could prove to be indicative of whether the current situation could evolve into a full-scale conflict, however, analysts at UBS believe that Trump will offer a ‘benign’ statement. Furthermore, the Swiss Bank notes that Iran’s Foreign Minister has stated the nation had ”concluded proportionate measures” and therefore, in the absence of a firm response by the US could signal that Iran is reluctant to escalate the situation and therefore introduce some cause for optimism. This would present a more favourable case for the market and likely reflects the current retracement of some of the knee-jerk moves seen overnight. Albeit, a complete resolution to the tensions between the two nations still appears to be some way off and hard to envisage at this stage.

HOWEVER: If investors were to take a more hawkish view of the situation, it is worth considering other options the US and other actors could take. From a US perspective, America has a notable military presence in the Middle-East and Persian Gulf, with President Trump over the weekend warning that any retaliation by Iran could see the US launch attacks on 52 Iranian sites: a number which reflects the events in 1979 when 52 American diplomats and citizen were held hostage in Iran. The location of such sites is obviously an unknown (for strategic purposes), however, depending on the importance to Iran of these targets, this could trigger a full-scale conflict or cripple the Iranian economy and thereafter lead to greater global macro implications. Note, Capital Economics suggested last week that a collapse in “Iran’s economy could knock as much as 0.3%-pts off global GDP – equal to our estimate of the damage from the US-China trade war". It is also worth noting that Iran themselves still have further options and could opt to carry out further missile attacks, even on US warships and US drones, whilst also launching cyber-attacks on US infrastructure and continuing to heighten violations of the nuclear deal. Furthermore, if the situation escalates, other nations will likely be brought into the conflict with Iraq’s involvement likely to increase as well as Saudi Arabia, Lebanon, Yemen, Syria and Israel potentially set to either be a basis for Iranian attacks or help facilitate US operations in the area. Note, it is also worth noting the risk of Russia and China being dragged into proceedings, however, for the purpose of this piece, our immediate focus will be on the statement from US President Trump.

08 Jan 2020 - 09:39- Energy- Source: Newsquawk