US Strikes On Iran: How Markets Will Trade

Here’s an initial markets framework for how to interpret developments in the Middle East:

• Cryptocurrencies are the one major asset class that is always
  open, but they are providing no clear takeaway. After spiking on
  the initial headlines that the US had completed successful
  attacks on three nuclear sites in Iran, they soon resumed their
  downtrends of the past week. Most major altcoins today traded to
  the lowest levels in more than two months. Bitcoin is holding up
  a little better, but may follow suit soon on the combination of
  a negative hit to retail sentiment and more expensive energy.
  

• Stock markets in the Middle East will be open Sunday and will
  obviously sell off due to regional uncertainty, but they are
  often uncorrelated to global exchanges and so don’t provide a
  good guide to Monday’s trading elsewhere.
  

• Oil prices will spike, but unless the Strait of Hormuz gets
  sustainably disrupted, it’s likely crude will pare those gains
  throughout the week. The macro backdrop is large supply on the
  sidelines that would be keen to take advantage of higher prices,
  while hedge funds were already positioned bullishly into the
  weekend and will now face the temptation to lock in profit.
  

• A knee-jerk haven bid will see Treasury yields dip at the
  open, but that won’t be a sustainable move without material re-
  escalation. The potential for such a US attack was well-flagged
  and, for now, is being communicated as a one-and-done successful
  mission that has set Iran’s nuclear ambitions back years.
  Precedent shows that the inflationary impulse from higher oil
  prices quickly dominates the risk-aversion prompted by Middle
  East tension/conflict. Barring other inputs/data, we should
  expect yields to finish the week slightly higher.
  

• The dollar will rise again. Part of this will be driven by
  deleveraging flows (which means a return to the world’s reserve
  currency), but that will be abetted by the US being a relative
  beneficiary of higher oil prices. The emphasis on “relative” is
  important, as few countries ultimately want more expensive
  energy prices, but America is the world’s largest crude producer
  and so the net impact is more complex. The delayed reaction of
  higher yields may subsequently help the greenback too. Such
  dollar strength will be slightly disguised when looking at broad
  indexes as a measure, as a few other haven currencies will
  outperform on Monday (and, for example, JPY has a large
  weighting in most of those measures).
  

• Stock markets will weaken on the open but, without material
  re-escalation, don’t expect the selloff to stand out
  dramatically in context of this year’s volatility. Major Asian
  markets may have more problems than most global peers as they
  are all energy importers.