Wednesday, 15 January 2020

IRAN STRIKES BACK AT US RISK AVERSION REIGNS

Lukman Otunuga,
Senior Research Analyst at FXTM

A tidal wave of risk aversion engulfed financial markets on Wednesday, after Iran launched retaliatory missile strikes against US forces in Iraq.

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Global stocks fell slightly, while Gold punched above $1600 as escalating tensions in the Middle East accelerated the flight to safety. Iran’s retaliation has raised fears of a full-blown conflict with the United States and this negative sentiment is poised to weigh on emerging markets this week. There is a lot of uncertainty in the air with markets still in ‘wait and see’ mode until further clarity is provided on the US-Iran faceoff.

Markets have stabilized to some degree after the initial burst of volatility with investors taking some reassurance from the absence of US casualties and the measured tone of the official responses. President Trump is expected to make a statement later today in response to the Iranian strikes which should give direction to markets.

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Nevertheless, heightened tensions in the Middle East will most likely weigh on global risk sentiment, ultimately denting appetite for emerging market asset and currencies. On a brighter note, emerging market energy oil exporters such as Nigeria could benefit from higher oil prices in the short term. Appreciating Oil prices may result in higher export earnings and government revenues for Africa’s largest economy.

Nigeria’s latest inflation figures may be published as early as Friday January 11 with markets forecasting consumer prices to jump to 12.10% in December amid the ongoing border closures. Signs of inflationary pressures making a return are likely to cool any speculation around the Central Bank of Nigeria easing monetary policy in Q1. The country’s economic outlook will remain influenced by Oil price volatility and US-China trade developments.

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Oil sensitive to geopolitics
The explosive moves witnessed in Oil prices over the past few days highlight how sensitive the commodity is to geopolitical shocks.

WTI Crude blasted higher during early trading on Wednesday, breaking above $65 after Iran fired missiles at air bases in Iraq housing US troops. Given how this development raises fears of more tensions in the Middle East, Oil prices are poised to remain volatile in the near future with all eyes now on President Trump’s reaction and any signs of US retaliation. It will be interesting to see how far geopolitical shocks support Oil prices before investors re-direct their focus back towards US-China trade and global growth.

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Regarding the technical picture, WTI Crude pared some of its gains after spiking towards $65.65 during the early parts of Wednesday morning. Bears could re-enter the scene if prices close below $62.00 with

Gold turbocharged by risk aversion 
In other news, Gold exploded higher on Wednesday, punching above $1600 for the first time in almost seven years as geopolitical shocks sent investors flocking to safer segments of the market.

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Escalating tensions in the Middle East have hit global risk appetite, boosting buying sentiment towards safe-haven assets. Gold bulls remain in the driving seat with further upside expected as uncertainty supports the flight to safety.

Focusing on the technical picture, the precious metal is heavily bullish on the daily charts as there have been consistent higher highs and higher lows. A solid daily close above $1600 may encourage a move towards $1630. Alternatively, sustained weakness below $1600 could trigger a retracement back towards $1570 and $1555.

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