Israeli Prime Minister Benjamin Netanyahu expressed concerns regarding Iran’s intensified production of ballistic missiles after previous damage from Israeli strikes. Plans are underway to brief then-US President Donald Trump on potential actions against Iran, according to knowledgeable sources.
At the time of reporting, West Texas Intermediate crude oil rose by 0.54%, trading at $56.84 per barrel. Gold’s price increased by 0.59%, reaching $4,365.
Market Terms And Trends
In financial markets, “risk-on” and “risk-off” terms indicate the willingness to take risks. In a “risk-on” market, there is more optimism, leading to increased purchases of risky assets. Conversely, “risk-off” markets trigger caution, favouring less risky assets.
“Risk-on” conditions typically result in rising stock markets and commodities, apart from Gold, and strengthen currencies of commodity-exporting countries. During “risk-off” periods, there is a climb in Bonds, particularly government ones, increased appeal for Gold, and stronger safe-haven currencies like the yen, franc, and dollar.
Currencies gaining strength in “risk-on” scenarios include the Australian, Canadian, and New Zealand dollars, along with currencies like the ruble and rand. In “risk-off” periods, the US dollar, Japanese yen, and Swiss franc generally appreciate due to their perceived safety.
The growing tension between Israel and Iran is a major red flag for the markets as we head into the new year. We are seeing a classic “risk-off” scenario taking shape, as geopolitical uncertainty in the Middle East is rising once again. This situation demands that we prepare for increased market volatility in the coming weeks.
Investment Strategies In Volatile Times
We should consider long positions in oil derivatives, such as futures or call options on WTI and Brent crude. We remember how Brent crude prices shot up past $90 a barrel back in April 2024 during similar escalations. With WTI currently hovering near $88, any disruption to shipping in the Strait of Hormuz could easily push prices back into triple digits.
An increase in market fear is almost certain, making long positions on the VIX index a smart hedge. Historically, the VIX, which is currently sitting around a calm 14, jumped over 35% in just a few days during the direct Israeli-Iranian exchanges last year. Buying VIX call options or VIX futures could offer significant protection if broader equity markets begin to sell off.
The information points towards a flight to safety, which directly benefits traditional safe-haven assets. We should look at buying gold futures, as we saw gold rally over 8% to new highs during the tensions in early 2024. In the currency markets, this means going long on the US dollar and Japanese yen against commodity-linked currencies like the Australian dollar.
On the other side of this trade, we should anticipate weakness in equity index futures. A risk-off environment will likely put pressure on markets like the S&P 500, which has seen a fairly stable climb since the inflation scare of 2023 finally subsided. It may be wise to purchase put options on major indices or reduce overall long exposure to stocks.
