The ramifications of Donald Trump’s recent decision to pull out of the Iran nuclear deal will be felt across a host of markets for some time. Whether you agree with his call or not, and whether you believe it’s a setback for world peace, it brings traders opportunities and risks in the long and short term.
The market most affected, initially at least, is oil. Both Brent and WTI crude rallied to four-year highs in the wake of Trump’s withdrawal. Oil had already been in a rising trend since June 2017 owing to production cuts from OPEC members and Russia – the news of renewed sanctions hastened the uptrend as it could see as much as one million barrels per day of crude supply taken out of the market.
WTI crude oil currently trades at just over $71 per barrel
Brent crude oil currently trades at just under $78 per barrel
Fundamental factors, as opposed to technical ones, tend to dictate oil’s direction. If supply is threatened, prices tend to go up and vice versa. ‘Oil is much more susceptible to fundamental news than most other asset classes,’ says Intertrader’s Chief Market Strategist Steve Ruffley in his latest webinar on oil trading.
‘Now it’s back in the news it could be a product to trade,’ Steve says. ‘We have to be sensible; we have to use the right kind of risk profile and manage our expectations. But oil now is something that is a viable product to trade, it can be part of your arsenal.’
So what’s going to move oil and what kind of news should you be looking out for?
‘Think about reserves: who are the biggest producers; what possible cost implications are there. Political problems also have a massive implication on the price of oil and these are pretty much coming to the fore every week with America and Donald Trump.’
Take the concern about an impending US/China trade war for an example of how Trump’s idiosyncratic and unprecedented discourse impacts markets. The President sent global stocks tumbling back in March when he announced that he intended to impose stiff tariffs on steel and aluminium imports, and he has long railed against China for engaging in ‘unfair,’ ‘stupid trade’ that ‘cannot continue’.
His latest tweet, however, marked a change in tone: ‘China and the United States are working well together on trade, but past negotiations have been so one sided in favor of China, for so many years, that it is hard for them to make a deal that benefits both countries. But be cool, it will all work out!’
The dollar rallied to a fresh 2018 high on his sunnier mood.
The oil price surge has also triggered strong gains for energy sector shares. The share prices of oil majors such as ExxonMobil, Chevron, Royal Dutch Shell, ConocoPhillips, BP, France’s Total and Norway’s Statoil have all rallied.
The Iranian rial plunged to record lows against the US dollar after Trump’s deal withdrawal. But stronger oil prices should also support commodity currencies – currencies from countries that possess large quantities of commodities or other natural resources, such as the Canadian dollar, which has just risen above its 50-day moving average.
An exception is the Russian ruble. Russia’s national economy and currency are heavily reliant on crude oil prices, but the ruble has weakened following Russia’s own US sanctions.
Pairs to watch: USD/CAD, USD/AUD, USD/NZD
Gold and geopolitics
Gold is similar to oil in that it’s all about the fundamentals. It’s a safe-haven commodity that investors flock to in times of uncertainty. It therefore tends to climb on any whiff of geopolitical risk. However, safe-haven buying has so far failed to kick in since the US withdrawal from the Iranian nuclear accord, or indeed since heightened tensions in the Middle East after 59 Palestinian protesters were killed by Israeli fire.
What’s holding gold back is the strong dollar, which tends to put pressure on gold, and the precious metal currently trades below $1300. But keep an eye out for any escalation in tensions in the Middle East creating volatility in the financial markets – healthier conditions for safe-haven assets like gold.
Gold is also one to watch during the historic meeting between Trump and North Korean leader Kim Jong Un in Singapore on 12 June. Trump has promised that the pair will ‘both try to make it a very special moment for World Peace!’ If there’s any indication the unique encounter isn’t as harmonious as hoped – North Korea has threatened to walk away from the talks if it’s forced to surrender its nuclear weapons – gold is the asset for traders to watch.
Many, including his European allies, believe Trump’s rejection of the Iran deal makes the world a more dangerous place. Former US Defense Secretary Leon Panetta, for one, says that if Iran restores its nuclear programme, a military response may be the only option.
This tension is creating buying opportunities for defence stocks. US defence companies such as Lockheed Martin, Northrop Grumman, Raytheon, General Dynamics and United Technologies, which all supply the US armed forces, have all spiked since the US pulled out of the Iran deal.
Stocks to potentially short are the mainly European companies set to lose business with Iran. Shares in Renault and Peugeot both slumped on news of the re-imposed US sanctions. The French carmakers sold 162,000 and nearly 445,000 cars in Iran last year respectively – Peugeot claiming a 30% market share.
European leaders are fighting hard to keep the 2015 nuclear deal with Iran alive after the withdrawal of the US, but they admit there’s little they can do to threaten the Americans.