Oil Spikes as Iran Attacks US Bases in Iraq


US-Iran tensions came to the fore on Tuesday to send stocks lower despite favourable economic reports. Energy names were the biggest drags on indices as oil companies evacuated American staff from Iraqi oil fields; Chevron and Exxon were down 1.28% and 0.82% on the day. The ISM service-sector index came in at 55, a four-month high, while the trade deficit narrowed in November to $43.1 billion, a 3-year low. The DOW led the slide shedding 0.42% while the S&P and the NASDAQ slipped 0.28% and 0.03% respectively. Yield on 10Y USTs was higher closing at 1.8177%.


Prime Minister Boris Johnson will set out his plan to negotiate a trade deal with the EU by the end of the year on Wednesday, a move that is set to put him at odds with some of the UK’s industries. Boris will meet up with European Commission President Ursula von der Leyen and will lay out his vision of a trade agreement along the lines of the one Canada has with the EU where Britain will be free to set its own rules. The EU has so far emphasised that future access to the single market will depend on close alignment to European rules on such issues as environmental policy among others. Industries such as vehicles, pharmaceuticals and aerospace had already warned of the risks to competitiveness as well as added costs if regulatory alignment was dropped. The pound closed slightly lower at $1.3126 while yield on 10Y and 30Y UKTs closed higher at 0.792% and 1.247% respectively.


European data continues to whipsaw between signs of coming recovery and continuing slowdown with the latest inflation figures and German factory orders in stark contrast. Data for German factory orders for November showed the manufacturing slump largely remains as orders tumbled 1.3% against an expected 0.2% gain. Lower overseas demand for investment goods and stagnant demand for consumer products were cited as primary drivers according to the Federal Statistics Office report. Inflation on the other hand picked up to 1.3% from 1.0% in November driven largely by energy prices which should offer some form of relief to the ECB. The euro closed lower at $1.1153 while yield on 10Y and 30Y DBRs closed slightly unchanged at -0.285% and 0.256% respectively.


Flaring US-Iran tensions sent Asian stocks lower on Wednesday following the firing of missiles at US bases in Iraq. The NIKKEI slipped the heaviest posting a 1.57% loss on the day while the CSI and the HANG SENG closed 1.22% and 0.83% lower. The ASX fell a comparatively modest 0.13% on the day.


Brent spiked over 4% early Wednesday following the firing of missiles at US bases in Iraq by Iran. The US commented that there were no immediate casualties in the aftermath with President Trump promising a statement in the morning. Iran’s foreign minister curiously commented that “We do not seek escalation or war” in the aftermath. Oil had however pared those gains as the day went on to trade a little over Tuesday’s close of $68.27 a barrel.


The sanctions on Iranian oil sales helped Brazil record its highest ever oil exports and maintain the streak of rising crude exports to a sixth year in 2019. Exports rose to 1.172 million barrels per day, a 4.7% increase YoY with China being a major driver of the increase. China formerly exported a significant amount of oil from Iran and the demand may have likely been shifted to Brazil with exports to China growing 18% YoY and getting 63% of oil cargo up from 55.7% in 2018. Brazil as such became Latin America’s top oil exporter for the year with Mexico behind it. The real was slightly higher at 4.0658 to the dollar while BRAZIL 29s were flat, trading in the low 106s.


The effect of power cuts in South Africa led to a worsening in the manufacturing industry as the latest PMI figures showed the industry slipping further into contraction territory in December. Absa’s December PMI came in at 45.9 from 47.4 in November, a far cry from the 67.2 at the beginning of 2019; overall PMI slowed to 47.1 from 47.7 in November. The statement from the bank noted that the return of rolling blackouts in December “soured expectations” and that export demand could continue waning in the first half of the year. The rand closed weaker at 14.3119 to the dollar while SOAF 29s were higher trading in the low 101s.