Oil prices jumped and then fell back as Israel launched a retaliatory attack on Iran. Geopolitics is unbelievably hard to price – oil had just fallen to where it was before the Apr 1st attack on the Iranian embassy in Damascus, with WTI futures (Jun) touching $81 yesterday before rallying to $85.60 overnight. Since then the Jun contract has pared gains to trade around $82.60, with Brent at $87.80 from a high at $91. WTI for May has a bit more of a premium at $83.34 and the curve showing quite a steep backwardation as a result of the immediate geopolitical premium. 

Gold spiked north of $2,400 and then fell back. Bitcoin bounced firmly off the $60k support to $65k…what’s driving these two assets? We look at Bitcoin and Gold in our latest episode of Overleveraged. 

Gold – the red arrow marks the bottom the day before the October 7th attacks. A clear geopolitical risk premium has been driving the market, though a simple metric of M1 to gold above ground implies $2,400 is about average. The IAEA says no damage to Iran’s nuclear facilities … which is…good?? Reaction thus far is limited – what happens next is anyone’s guess. 

Source: Finalto 

Stock markets were more obviously risk off, with the FTSE 100 declining half a percent, the DAX down 1% after Asian markets were broadly lower. Wall Street was lower again, the S&P 500 closing down for a fifth straight day – its worst losing streak since October. Markets were already primed for de-risking on thoughts that the Fed is maybe not going to cut at all this year, so the Israeli strike is just noise for now. Wider escalation is the tail risk that is hard to price but a tighter Fed is cover for pulling in the horns.  

FX seems to be likewise trading on geopolitical basis with haven currencies attracting some bid. GBP has been a RoRo for a while and took a hit with soft retail sales adding to woes. CFTC data shows it’s got the biggest net long position in the G10 so is particularly sensitive to global risk sentiment. 

JPY caught strong bid but handed it back as data showed Japan’s CPI slowing from 2.8% to 2.7%, with core CPI down from 2.8% to 2.6%. Core inflation excluding fresh food and energy went below 3.0% for the first time since 2022. 

JPY and CHF may be winners from geopolitical escalation but look beyond USD crosses as the dollar is looking rather solid with the Fed steady. NY Fed’s Williams reiterated that there is no rush to cut…the H4L message. If oil prices get to $100 then we can see the Fed completely giving up on cuts this year. Divergence is still the name of the game and the geopolitics is not going to alter that. 

Neil Wilson

Chief Market Analyst at Finalto

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