Overnight News Creates Volatility

A shot of Chinese stimulus triggered global stock markets to leap at the start of 2020, but the New Year's party has come to an end.

A 200-point opening decline for the DJIA after the U.S. took out one of the most senior and revered generals in Iran, Qassem Soleimani (top Iraqi paramilitary commander Abu Mahdi al-Mohandes was also killed). 

Oil is moving in the opposite direction amid supply disruption fears, with crude futures ahead by 4% to $63.61/bbl, while safe haven gold is up 1.5% to $1551/oz to its highest level in almost four months. Iran's supreme leader, Ayatollah Ali Khamenei, has vowed that "severe retaliation" awaits Soleimani's killers, while the U.S. embassy in Baghdad urged all citizens to depart Iraq immediately.

Crude prices "will likely hold" around $70 a barrel, "but could make a run at $80 if the conflict spreads to the oil fields of southern Iraq or if Iranian harassment of commercial shipping intensifies," analysts at Eurasia Group wrote in a research note. "We expect moderate to low-level clashes to last for at least a month... Iranian-backed militias will attack U.S. bases and some U.S. soldiers will be killed; the U.S. will retaliate with strikes inside of Iraq." Iraq is the second largest producer in OPEC and exports about 3.4M barrels per day of crude mostly from southern Basra port.

This afternoon, the Fed will publish the minutes from its December meeting, when it held interest rates after three cuts earlier in the year. The release may shine some light on what central bankers are thinking about the repo market, where the Fed has been active over the last several months in an effort to control overnight interest rates. Investors will also look for hints on what it would take to shift the consensus view among officials that interest rates will remain on hold for all of 2020.