Oil and gold are back on investors’ radars this week after the assassination of a top Iranian general in Baghdad on Friday re-ignited geo-political tensions in the Middle East.
The price of Brent crude rose more than 2% to above $70 a barrel for the first time in three months on Monday, taking the oil price 5% higher since a US unmanned air strike killed Qassem Suleimani, a leading military figure in Iran and the man some described as the second most powerful in the country after supreme leader Ayatollah Ali Khamenei. This morning the price fell back to $68 as investors waited to see how Iran might respond.
Oil is particularly sensitive to US-Iranian tensions as an obvious way for Iran to retaliate against US aggression is by threatening oil facilities in the region, closing the narrow Straits of Hormuz through which 20% of global crude supplies is transported or, as it did last year, attacking Saudi facilities.
The immediate Iranian response to Friday’s drone attack on two cars leaving Baghdad’s airport on Friday was to say it would be withdrawing from all its commitments under the 2015 nuclear accord it signed with world powers in 2015. One of the first things Donald Trump did after entering the White House was to withdraw the US from that President Obama-led agreement but the accord had been limping on as a pact between Iran and other global powers.
Now the deal looks to be finished, raising the risk of Iran developing nuclear weapons capability and further destabilising the Middle East. Iran is already influential in a range of countries in the region from Iraq to Syria and Lebanon, as it battles for supremacy with rival Saudi Arabia. Proxy battles in those countries are a way for Iran to retaliate via sympathetic forces like Hizbollah in southern Lebanon rather than engaging in a probably unwinnable conventional battle with the US.
Meanwhile, gold has risen to a seven-year high of $1,580 an ounce as investors warm to the precious metal’s safe haven status at a time of rising geo-political tension. Gold has been appreciating for several years now, although it remains well shy of its all-time high of nearly $1,900 an ounce reached during the uncertainty of the Eurozone sovereign debt crisis in 2011.
Gold is viewed as a hedge against a wide range of upheavals, from currency crises to both inflation and deflation. With a limited global supply and an absence of political influence, unlike paper currencies which can be printed at will by Governments, gold is viewed as a store of value in difficult times. Hence its current popularity.
The main disadvantage of gold as an investment is its lack of income. Unlike a share or bond, it pays no dividend or coupon. However, at times of low interest rates, the opportunity cost of holding gold is reduced, another reason for its current fashionability.
One other safe haven asset to have regained the attention of investors this week is the Japanese yen, which has hit a three-month high against the dollar. A rising yen is typically bad news for the export-heavy Nikkei index in Tokyo, which fell 1.9% on Monday, although it rebounded by 1.6% today as risk appetite partially returned.
Volatility in the Japanese stock market was mirrored by risk aversion in other equity markets around the world as the pre-Christmas Santa Rally came to an abrupt halt. The Stoxx Europe 600 index fell 1.1% in early post-weekend trading and the FTSE 100 was 0.6% lower. The Vix index, which measures investor risk appetite, rose by 1.8 points to 15.9, although that is still low by historical standards and suggests no-one is panicking yet. The S&P 500 fell initially but ended Monday 0.35% higher.
The ups and downs this week should be put in the context of a stellar year in 2019, which emerged as one of the best since the financial crisis as investors enjoyed a return to monetary easing as the Fed cut rates between July and September and a reduction in trade tensions as the US and China edged towards a Phase One deal on tariffs.
The US led the pack, as the S&P500 index rose by nearly 30% over the year. Wall Street was in good company, though, as equities around the world, government and corporate bonds, commodities and precious metals all did well.
Looking forward to 2020, there are understandable fears that after such a strong run a correction must be imminent. But that’s not a given against a backdrop of still fairly subdued sentiment, reasonable valuations (outside the US at any rate), and forecasts that the global economy will experience a soft landing this year.
Investors should also bear in mind that the odds are stacked in their favour. An analysis of the performance of the MSCI World index over the past 50 years shows that the index rose in 36 of those 50 years for an average gain of 8% a year. In the 16 years when the global index moved by more than 20%, 13 years were gains and just three losses. In the 35 years when the market moved by more than 10%, 27 were up years and just 8 down.
On the corporate front this week, attention shifts quickly to retailers’ Christmas trading statements. The supermarkets are the first out of the blocks, with Aldi kicking things off yesterday with a positive update that showed sales breaking through £1bn over the Christmas period for the first time. The German discounter now accounts for 8% of UK supermarket sales, up from 7% a year ago and just ahead of Lidl’s 6%.
That means the two are between them more than just an irritant for the incumbent British grocery giants, which are expected to have had a tougher time of it over the festive period. Morrisons reported sales 1.7% lower this morning and Tesco, M&S and Sainsbury’s are all forecast to have seen declining sales this year. They report on Wednesday and Thursday this week.
The struggle to grow share in a hugely competitive market is reflected in the sector’s share prices which in many cases are below where they were 10 years ago. That’s true even of the dominant player in the sector, Tesco, which commands 27% of the market and enjoyed a 25% rise in its share price last year as a turnaround under boss Dave Lewis gained traction.
When it comes to economic data, the holiday period is well and truly over with a steady stream of purchasing managers, house price and employment numbers due to be announced over the next few days.
US hiring is forecast to have cooled in December, after a much better than expected reading in November when non-farm payrolls were boosted by the end of a strike at General Motors. Around 160,000 new jobs are forecast to have been created in the month, leaving the unemployment rate unchanged at 3.5%. Average hourly earnings are expected to have risen by 0.3% month on month.