By Stephen Innes
It is was punishing day for equity markets as smouldering Middle East embers look set to ignite into raging geopolitical firestorms after President Trump warned Russia "get ready" for missiles being launched at Syria.
War drums, tweets and the FOMC minutes made for a chaotic session with the Syrian conflict up front and centre, but adding to regional tensions, Saudi Arabia shot down two missiles sent from Yemen over Riyadh.
Predictably, equity sentiment ran sour all day as investors move from trade war fires into the geopolitical frying pan as a thick geopolitical stew of fear brews. But as the day wore on, political moods tempered on, as did the markets' negative sentiment.
The FOMC minutes were interpreted as hawkish and provided investors reasons to buy back some USD, but not excessively so. With the war drums quietly beating in the White House, markets tend to ignore the "run of the mill"-type issues like the FOMC minutes.
Escalation and provocations in the Middle East are driving oil prices higher, and we could be setting up for an eventual test of $70.00+ WTI. Oil prices are already up 8% this week on the Syrian conflict, but if we start to factor Saudi, Iran and Israel into the escalation matrix, we could be looking at WTI beyond $75.00 in a heartbeat.
Case in point, developments in the Middle East crowded out a soft DoE inventory report, which showed a headline build of 3.3 million.
Very much a binary trade at this stage as the markets start to factor in possible Middle East escalation. While we expect volatility to remain high, gold will stay supported. So as long as the US military option remains on the table, gold will continue to bid.
But we could see prices rocket higher if both the US and Israel get drawn into the fracas, siding with Saudi Arabia in Riyadh's escalations with Tehran. A test of $1400 +would be on the cards immediately
FX markets have been in stasis again, but players remain on high alert for Middle East escalation.
It makes sense to stay long JPY amidst a massive uptick in geopolitical tensions. But why we haven't taken out essential support at 106.60 remains a bit of a head-scratcher.
Risk aversion has weighed down ringgit sentiment overnight. And the lack of activity on the domestic bond markets suggests the ringgit will be hard-pressed to make substantial gains ahead of the election.
Oil prices remain incredibly supportive, but with the market in full risk-averse mode, there remains little appetite for the MYR these days.