In the early hours of Saturday morning, the U.S. and Israel launched joint military action against Iran.
The operation caught many folks by surprise. There was still talk of negotiations taking place this week.
However, the deaths of Iran’s supreme leader, Ayatollah Khamenei, and many of the regime’s leaders leave a massive power vacuum in the Middle East. Despite his age and ailing health, Khamenei had not appointed a successor.
Whoever takes over, one thing is for sure: There will be lots of uncertainty ahead. With Iran retaliating against many of its neighbors on top of striking Israel, there’s no way of knowing how widespread the war could become.
And we don’t yet know how that’s going to play out in the markets…
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The strikes saw gold rally up toward the $5,400 level – around 3.5% below its January all-time high. Silver got pulled up in the action, trading back around $95.
However, the main focus was on oil.
The spot price of West Texas Intermediate (WTI) initially hit $75 before pulling back to around $72 – up from Friday’s $67.30 close. Brent oil briefly traded above $82 before giving up $2 to $3. That’s also significantly higher than its Friday $73.60 close.
With shipping through the Strait of Hormuz essentially halted – blocking transport of roughly 20% of global oil production – we’re seeing plenty of speculation that oil could trade up through $100.
Jumping oil prices have plenty of ramifications for the global economy, especially when there’s no telling how long the war will last…
Some have predicted that the military strikes could be over in just a few days. But President Trump has warned that activities could last at least four weeks and possibly longer…
While gold, silver, and oil spiked, news of the strikes saw uncertainty sweep through equity markets.
Asian, European, and U.S. stock futures fell on the news before regaining some lost ground. That accompanied a move into safe-haven assets.
Along with gold, the U.S. dollar (USD) made another leg higher. The U.S. Dollar Index (DXY) was recently trading around 3% above its January low (a sizeable move in currencies).
Looking forward, while energy and defense stocks should outperform, other sectors like emerging markets, speculative small caps, and consumer discretionary could get pulled into the risk-off move and cause some heartache for investors.
Short-term gyrations aside, the market will pay close attention to the impact of higher oil prices on interest rates. The longer the hostilities go on, the bigger that impact will be.
Before hostilities broke out, we’d already seen a bump up in inflation on Friday with the core Producer Price Index (PPI), which excludes food and energy, hitting 0.8% month-over-month (MoM). That was 0.5% above expectations.
Year-over-year (YoY) core PPI data is tracking at 3.6%. If oil prices remain higher longer than expected, we’ll see a bigger inflation impact on the economy.
Not only will that reduce the prospects of rate cuts, but it could also bring rate increases into play. That threat will loom over an already fickle market.
So it will be vital to trade carefully in the coming days and weeks as we gain clarity on the path ahead.
If you want to learn more about how I plan to trade amid the chaos – and what I’m calling Trump’s “Project 2026” – then you can tune in to my recent briefing here.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
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