Here’s a brief recap of the key developments in the Middle East war that occurred over the weekend, which are expected to have a significant impact on markets in the upcoming week.
- Citing an official, Axios reported that the US and Iran have agreed to end more than three days of retaliatory strikes in and around the Strait of Hormuz and engage in further technical talks on Tuesday in Qatar.
- Earlier, talks to end the US war with Iran were reportedly on hold after the US struck Iranian military targets in retaliation for Tehran’s latest strikes on shipping vessels in the Strait of Hormuz.
- The Islamic Revolutionary Guard Corps (IRGC) said its forces have destroyed eight US military sites in Kuwait and Bahrain, with the attacks described as retaliation for recent US attacks on Iranian facilities. Washington noted that a wave of Iranian drone and missile fire late Saturday did not hit its intended targets.
- Iran’s Foreign Minister Abbas Araghchi said that the Strait of Hormuz remains under total Iranian control for the next 30 days and any US attacks will only exacerbate the precarious situation.
- US President Donald Trump accused Iran of violating the memorandum of understanding between Washington and Tehran and threatened to “militarily complete the job.”
Market implications
Markets turn risk-averse on Monday, boosting demand for the US Dollar Index (DXY) and WTI crude amid uncertainty surrounding US-Iran peace talks.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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