Global investors further grapple with US-Iran fallout risks

Dubai: Global investors continued to grapple with the fallout from a US airstrike that killed a top ranking Iranian general, with tensions heightening in the Middle East and markets trading deeper in the red.

Angst escalated between the world’s two biggest oil producing countries, Iran and the US, after President Donald Trump doubled down on its threats against the Middle Eastern country, who in turn said that it would abandon a landmark international nuclear pact.

Popular gauge MSCI’s Emerging Market and Asia Pacific indices both sunk 1 per cent and the STOXX Europe 600 Index fell 0.6 per cent. The Dow, S&P and the Nasdaq were seen falling further after having their worst trading day in a month on Friday.

“The renewed surge in US-Iran tensions has pushed geopolitical risk back up the list of things to worry about in 2020,” said Michael Pearce, Senior US Economist at Capital Economics.

After the killing of Qassem Soleimani, an architect of its growing influence in the Middle East, the US warned of a “heightened risk” of a missile attack near American military bases. Trump vowed to slap sanctions on Iraq if US troops were pushed out from the country and Iran said it would no longer abide by any limits on its enrichment of uranium.

All bets are off

“We are starting to feel that all bets are off when it comes to the nuclear agreement,” said Jonathan Barratt, Chief Investment Officer at Probis Securities. “It is now left to a whole lot of speculation as to what could happen in the market and until we see more concrete evidence from the US, it is a very fluid situation.”

The sudden American strike on the Iranian general served as a reminder that markets remain vulnerable to geopolitics, while also dampening enthusiasm seen at the start of the year. The S&P 500 index hit a record on its first trading day of the year with investors looking ahead to the planned signing of a US-China phase-one trade deal later this month.

“It is still too early to call it a strategic game-changer for markets but, nevertheless, the next steps for investors should logically be buy dips on anything oil-related, be it commodity, equities or currencies, until Brent forays into the $80 area,” said Stéphane Barbier de la Serre, macro strategist at Makor Capital Markets.

Oil jumped to four-month peaks, with the price of Brent oil - the international benchmark - jumping above $70 a barrel.

If things escalate, then oil prices could quite easily go up to $75 or higher, Barratt said, while adding that the global economies at the moment are not strong enough to be able to absorb significant price increases in oil imports. Analysts at Capital Economics warned that the price of oil could spike to $150 a barrel if the warlike rhetoric between the two countries turned into action.

Investors also scurried for a second day to the safety of gold, which hit a near seven-year high.

Emerging markets hit

Barbier de la Serre said emerging market countries, also known as emerging economies or developing countries, should comparatively suffer more than the US as most of them are oil-importers. They face the threat of a currency crisis, which occurs when a nation is unable to pay for imports and typically accompanied by a rapid decline in the value of the affected nation’s currency.

Emerging markets like India are facing the heat, with the benchmark equity indices on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) trading in a sea of red on Monday. The S&P BSE Sensex cracked 787.98 points or 1.90 per cent after falling as much as 850.65 points.

China’s top index gave up early gains to end lower on Monday, with investors forced to overlook positive cues such as progress in Beijing’s policy support to prop up the economy. The blue-chip CSI300 index ended 0.4 per cent lower at 4,129.30, while the Shanghai Composite Index was flat at 3,083.41.

The Pakistan Stock Exchange lost over 800 points to slip below the 42,000-point level, a position it had managed to maintain after 15 months. Egypt’s EGX 100, which has fallen over 6 per cent since the start of the year, was down for a second day after dropping 1.5 per cent.

Dubai bourse’s main index edged slighter higher on Monday, a day after it recorded steep losses of over 3 percent. Abu Dhabi’s ADX slipped 0.4 per cent, after dropping as much as 1.4 per cent on Sunday.

“Most traders [on the DFM] opted to remain on cash as we did not witness any buying from lower levels during the late session, which signals further decline,” Shiv Prakash, senior analyst at First Abu Dhabi Bank Securities (FABS) wrote in a note.

In Dubai, real estate giant Emaar Properties and top lender Emirates NBD closed higher, a day after both stocks recorded declines. Prakash said “non-stop selling” forced Emaar to shed about 4 per cent on Sunday and had urged investors to cover short-positions if the stock had declined further.

Saudi Arabia’s Tadawul All Share Index stayed largely unchanged and the main benchmark in Qatar gained 1 per cent, after both the indices lost over 2 per cent a day earlier.