Geopolitical risks in the region are high after the U.S. military took “decisive defensive action to protect U.S. personnel abroad by killing Qasem Soleimani,” a statement by the U.S. Department of Defense said Thursday night. The DOD added it was a directive from President Donald Trump.
“This is something that the markets have been discounting for a very, very long time,” said John Caruso of RJO Futures. “And now you kind of wait and watch for the counter reaction from Iran.”
‘A good excuse to get a small correction’
“In September, following the Aramco attacks, that we felt that the market was severely discounting the possibility of an escalation of geopolitical events,” Caruso said. “If you remember, back over the summer, we did see the Iranian attacks on the oil tankers over in the Strait of Hormuz.”
As of midday on Friday, markets had clawed back some of their losses as investors appeared to be scooping up relatively cheap stocks. One analyst called the airstrike “a good excuse to get a small correction.”
“When I say a small something in the neighborhood of of maybe four to 6% — not a real technical correction of 10%. And certainly not a bear market,” Anthony Chan, former JPMorgan chief economist, told Yahoo Finance. As Chan explained, “When the market is run up this much almost anything is correction worthy, even if we wouldn't have gotten the shock.”
Risk of retaliation
“I do think ultimately, you're probably going to see a little bit of a risk premium come off here in the near term in the price of crude,” Caruso added. “And of course you’ve got to watch the strength of the U.S. dollar (DX-Y.NYB) going forward. We may have just seen a major correction in the U.S. dollar — a major breakdown on the charts and the dollar going forward. And that's also going to fuel the price of crude oil higher here over the near term.”
Tracey Marx Bernstein is a senior producer at Yahoo Finance.