Capital markets react to the news
Geopolitics will be the name of the stock market game for the coming days as America and Israel follow up on their threat of airstrikes on Tehran, in the process eliminating the Ayatollah and many of his principal henchmen. This is the 2nd leader the president has removed in as many months.
This morning, as traders arrive at their desks, the reaction from various asset classes will be fairly predictable. Asian markets were down anything between 1-2%, European markets likely about the same, initially anyway, according to the overnight futures markets. The Gold price is higher, but not by much. Oil prices leapt by around 10%, and the US dollar is a bit stronger.
Trading around geopolitical events is a risky business. It often pays to sit tight and wait for the picture to become clearer, as outcomes can vary and the picture can change quickly. Initially, you may find growth names get hit again, as the more defensive sectors are less affected. Healthcare and consumer staples are likely to outperform. Defence stocks are likely to do well for obvious reasons.
At present, there does not seem to be anything other than a considered reaction across various asset classes. Trump’s comments that Iran wants to talk and that he is open to lifting sanctions under the next leader may be having a stabilising influence. The Wall Street Journal reported that Iran’s security chief is making a fresh push to resume talks with the US.
Ultimately, the oil price will most likely dictate the impact on the global economy. Stocks often dip amid rising geopolitical uncertainty, which can provide a buying opportunity as calm is restored. The clearest exception to demonstrate this was the 1973 Yom Kippur War, which triggered a massive bear market because it led to an extended reduction in oil supply to the rest of the world.
The 2nd month of the year flew by. Leadership rotation was a major theme as investors continued to lighten up, away from tech mega-caps toward more value sectors. While U.S. large caps struggled, international equities once again outperformed.
KKR became the latest firm to report issues with its credit funds, citing a jump in troubled loans and lower investment income, underscoring the strains in private markets. Concerns about rising credit losses have affected the stocks of listed private capital groups in recent weeks.
Looking away from geopolitics, and to the week ahead. The monthly PMI data for manufacturing and services will be released around the world in the coming days. The preliminary flash PMI painted a mixed picture for February. Then, on Friday, the publication of the monthly US employment report will be of keen interest, as it may further influence sentiment on US interest rates.