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Why markets are not worried about Iran

President Trump announced sanctions on Iran, but with no signals about other retaliation, the markets appear convinced of no further escalation of hostilities.

“President Trump’s statement on Iran delivered more saber-rattling with hints of a premature victory lap,” said Edward Moya, senior market analyst, New York at OANDA. “Risk assets extended their gains after it was clear this speech was de-escalating the U.S.-Iran conflict.

The president said, “Iran appears to be standing down,” suggesting the U.S. would not retaliate for the barrage of missiles at Iraqi bases that house U.S. military.

“Wall Street seems convinced we will not see the U.S. and Iran fully enter into a war,” Moya added. “The conflict is far from over and it seems we could continue to see a prolonged period of proxy wars in the region.”

“Overall bond/Treasury markets don’t seem concerned at all," said Tony Bedikian, head of Global Markets at Citizens Bank. "In fact, rates are higher, signaling the Iran retaliation was far less ‘bad’ than anticipated.”

Dec Mullarkey, managing director for investment strategy at SLC Management, said, “Iran is unlikely to solicit a full-scale U.S. attack by choking off key shipping lanes as that would derail its economy.”

By using “proxies, it can deflect accountability and sponsor targeted attacks across the gulf,” which would force “the U.S. to commit more security to the region.”

Calling it “too soon to speculate on how provocative the standoff will be,” Mullarkey noted, “if it keeps escalating risk sentiment could quickly cool.”

In any event, “global policy uncertainty and geopolitical risk will remain elevated despite dropping off from the highs reached last year amid the trade war,” said Matt Gertken, geopolitical strategist at BCA Research.

There remains the threat of escalation, although, he agrees, “Iran is not yet likely to court a full-scale American attack by shutting down the Strait of Hormuz.”

Wilmington Trust Chief Investment Officer Tony Roth said neither side wants to escalate the situation, noting that doesn’t mean this is end of hostilities, but the possibility of a wider conflict seems to be receding.

In the intermediate term, Roth said they don’t expect the situation to have a negative impact on the U.S. economy or on the price of oil.

In the medium term, because Iran is isolated economically and politically, like North Korea, they see it cautiously moving toward acquiring a nuclear capability to bolster its influence and respect in the Mideast.

“This may increase the probability of Iran coming a nuclear state in the medium term,” he said.

Earlier, in a radio interview, Scott Colbert, executive vice president and chief economist at Commerce Trust Co., noted, “I would caution everyone that we’ve been at some stage of war since 9/11 and yet we’ve had the longest economic recovery ever.”

Rather than focusing on Iran, Colbert suggested, the markets should watch what happens with Boeing, which halted production of its 737 Max. “The risk to the economy of Boeing not getting that 737 back — because Boeing is our largest exporter of any product that we have — is relatively large from an economic point of view.”

Colbert said the trade war with China and the elections are other factors that could impact the economy.

ADP
Private sector payrolls grew by 202,000 in December, ADP said Wednesday, and the November figure was revised to a 124,000 increase from the initially reported 67,000 gain.

Economists polled by IFR Markets expected a 156,000 rise.

“Looking through the monthly vagaries of the data, job gains continue to moderate,” said Mark Zandi, chief economist of Moody’s Analytics. “Manufacturers, energy producers and small companies have been shedding jobs. Unemployment is low, but will begin to rise if job growth slows much further.”

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