US-Iran tension to lead to bumpy markets, but not bearish trend: Peter Cardillo

Keep the powder dry, wait and watch US response, say analysts
January 8, 2020
As Tensions Betwen Iran Vs USA Mounts, What Will Trump Do Next? | India Development Debate
January 9, 2020

US-Iran tension to lead to bumpy markets, but not bearish trend: Peter Cardillo

If US gets involved in a long-lasting war with Iran, that would take a bite out of economic activity, but not to the point where it could send us into negative growth, says Peter Cardillo, Chief Market Economist, Spartan Capital Securities. Excerpts from an interview with ETNOW.

Did you wake up to the news of the retaliation on US airforce base by Iran this morning? How do you view it?

Obviously, this was expected. I was a little bit surprised. I thought they were going to wait a bit longer but they did take action and as a result of it, the markets have responded negatively. We have safe haven investments going through the roof. Gold is trading at over $1600 and the price of crude is up over 4% as we speak. The equity markets are under severe pressure but as I said, this was widely expected. The next big question for the markets is are we going to see panic selling as the markets open in the States on Wednesday morning?

My guess is no. We will have a nasty opening, a bumpy ride but I do not think we are going to see panic selling. When it is all said and done, we will continue to have a bumpy ride in stocks due to the uncertainties between the United States and Iran but I do not think that we are headed for any major war with Iran. I doubt very much that Iran is going to close the Strait of Hormuz which would virtually stop the flow of oil and that would be very damaging not only to the United States but to the global economy as well and their own economy too. So, yes, we will have negativity, we will have up and down days, but I do not think it is going to unravel the bullish sentiment that the market has up until now.

Are we going to get into a situation where it is going to be a downward trend in the Emerging Markets? No. The fundamentals of United States is strong and to a certain degree we are seeing the global economy beginning to pick up.-Peter Cardillo

The general who has come in place of General Soleimani did warn that they have identified 13 strategies and they will retaliate without much delay. The retaliation has actually happened. What explains yesterday’s rebound in global equities if this tail risk existed on the table? Why did US or global markets not see follow-up pressure? There was a sharp rebound.
Yes, that is a good question and I think the answer is simply this that it appeared that Iran was in no rush to counter effect and of course that was proven wrong this evening. But the fundamentals of the stock market and the US economy are quite solid. We see that on a daily basis. The macro news today was that the ISM Non-Manufacturing Service has actually expanded. We also saw a narrowing of the trade deficit, though part of that is due to tariffs. It is certainly a good indication that economic activity in Q1 of this year is probably going to be a surprise to the markets and fundamentals will remain in place. Of course, if we get involved in a long-lasting war, that would take a bite out of economic activity, but not to the point where it could send us into negative growth.

The extra liquidity from central banks had started moving towards Emerging Markets in the last couple of weeks. Do you think that will get halted thanks to the geopolitical developments?

The Emerging Markets have begun to spring up only because the global economy has showed signs of regaining strength. Let us not forget that next week, the first part of the trade pact between United States and China is going to be signed and that is a relief in terms of global economic activity. Should we expect bumpy markets? Should we expect the markets to have nasty trading days? Absolutely. But are we going to get into a situation where it is going to be a downward trend in the Emerging Markets? No. The fundamentals of United States is strong and to a certain degree we are seeing the global economy beginning to pick up somewhat. Look at some of the numbers that have come out of Europe recently and also that from China. There is a real basis for the stock markets to avoid a major reversal and wind up in a bearish trend.