Cambridge Weekly Update – 6th January 2020

2020 starts with a Trump card

And it was all going so smoothly, we had planned to write that it was a quiet week. Christmas a fading memory and the New Year with had some positive news on US-China trade relations, helping markets edge higher on Thursday night. Then came the biggest geopolitical act in months: a US drone airstrike killed Qasem Soleimani, the head of Iran’s elite Quds force, on the streets of Baghdad. It is hard to overstate how important a figure Soleimani was in Iran. He was accepted as Islamic Republic’s second most powerful leader, ahead of President Rouhani and behind only the Ayatollah. This is a massive step up in tensions between Iran and the US, and a significant increase in near-term global risks.

This event brings into contrast our recently discussion that both markets and the underlying economy are finely balanced. A return of confidence led to an ongoing rally in asset prices and the reduction in US / China political risks had created a large flow of cash into riskier investments.

Now, markets have been “re-sensitized” to political shocks and all geopolitical news is able to create reaction. President Trump’s announced the drone strike by simply tweeting an image of the American flag, and escalating tensions further. Global oil prices spiked more than 4% up in the wake of the news, equities fell, and fixed-income bonds saw reversals of the sharp losses experienced during the quiet period – evidence of the impact such events have on markets.

Read the full Commentary here