Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Middle East tensions drive oil and gold higher
Ole Hansen
Head of Commodity Strategy
Summary: The month long rally in gold and not least oil has extended further today following the U.S. strike against an Iranian general in Baghdad. Middle East tensions once again raise risk of supply disruptions while investors take shelter in gold as stocks falter and inflationary pressures emerge
The ongoing tensions between the U.S. and Iran hit a new high today after a U.S. pre-dawn raid near Baghdad airport killed General Qassem Soleimani, the head of Iran's elite Islamic Revolutionary Guard Corps' Quds Force, and architect of its regional security apparatus. The raid also killed an Iraqi militia commander who had been accused by the U.S. of orchestrating the end of December attack on the U.S. embassy complex in Baghdad.
These developments signal a worrying escalation in the Middle East with the markets now awaiting the response from Iran. Decades of open and covert hostility between the U.S. supported by Saudi Arabia and Israel and Iran often finding support from Russia and China has now reached a very dangerous stage. There are plenty of news available about these latest events: Reuters: Soleimani was Iran's celebrity soldier, spearhead in Middle East Bloomberg: What to Know About the Escalating U.S.-Iran Conflict Al Jazeera: Iran's Qassem Soleimani killed in US air raid at Baghdad airport
The market reaction has been swift with Brent crude oil reaching $69.15/b, the highest level since the September Aramco attacks in Saudi Arabia. Gold’s safe-haven credentials meanwhile have given a renewed boost and it has built further on the late December rally to now stand less than 1% from the September peak at $1557/oz.
Brent crude oil reached but failed to breach the downtrend from the April 2019 peak overnight. Above that level the next resistance will be the September 16 peak which occurred after the attack on Aramco facilities within Saudi Arabia. An attack that Iran was blamed to have carried out.
The combination of central bank stimulus and rising food and energy prices will only add to our view that inflation or the risk of rising inflation will become a theme in 2020. Gold’s behavior during the past few months support this view. Despite seeing record highs in stocks and increased risk appetite gold only managed a weak correction from the September peak before resuming its rally during December.
The UN FAO’s basket of 55 key food commodities rose 10% y/y in November with the next update for December due next week. With crude oil currently up by more than 30% y/y the outlook for rising inflation through higher input costs only adds to the outlook for higher gold prices.
Gold’s correction phase following the surge to $1557/oz last September only managed to yield a weak 38.2% correction. Especially the performance during December when U.S. stock indexes reached record highs and EM bonds and stocks got bought was impressive. It highlighted the emerging focus on inflation and the dollar which showed signs of weakness last month.
Following the break above $1518/oz gold is once again eying a test of the mentioned September high. With the market already on the move the latest developments in Baghdad has sped up the move towards challenging the mentioned high. A break above would, using Fibo extensions, bring $1589/oz and $1622/oz into focus
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