Breaking: US and Israel attack Iran, risk aversion to sweep global markets
Early Saturday, United States (US) President Donald Trump announced that the US had begun “major combat operations” in Iran, following Israel’s pre-emptive missile attacks against Tehran.
The US bombed multiple locations in Tehran, Iran’s Tasnim news agency reported.
Israel’s Prime Minister Benjamin Netanyahu said that the attacks on Iran were aimed to remove an “existential threat”.
Meanwhile, the Israeli army confirmed that missiles were launched from Iran, prompting sirens in several areas of the country. The Israel Defence Force (IDF) further noted that retaliatory strikes have been launched by Iran.
Israel has declared a state of emergency and advised its citizens to stay close to shelters.
Market implications
A big risk-off wave is expected to rattle global markets as a new week kicks off on Monday, with intense flight to safety likely to set Gold on fire, while Oil prices are also seen storming through the roof.
Safe-haven currencies such as the US Dollar (USD), Japanese Yen (JPY) and the Swiss Franc (CHF) will be the most sought after, while global equity markets could come under tremendous selling pressure.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.