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Traders Go Phew on Syria But Won't Declare Mission Accomplished

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(Bloomberg) -- The U.S.-led military strikes in Syria on Friday may have been met with a collective sigh of relief in global markets, but investors are hardly letting their guard down as U.S.-Russia tensions simmer.

Although haven assets such as gold and U.S. Treasuries aren’t rising, stocks in Asia relinquished earlier gains. Russian markets themselves also retreated, with bonds, the ruble and stocks declining after the U.S. said it will impose fresh sanctions on Moscow following Syria’s reported use of chemical weapons.

“Investors don’t expect any significant escalation of military activity between the West and Syria’s government and its main backers, Russia and Iran,” said Mansoor Mohi-uddin, head of currency strategy at NatWest Markets in Singapore. “What would make investors concerned again would be a response from the Syrian government or its allies that broadens the conflict beyond Syria’s borders.”

U.S. President Donald Trump declared “mission accomplished” via Twitter on Saturday, a day after the U.S., France and the U.K. carried out strikes in response to Syrian leader Bashar al-Assad’s suspected chemical attack on civilians. U.S. oil futures fell back below $67 a barrel as there was no significant response to the missile attack. Stocks across most Arab markets extended their gains from Sunday, while U.S. stock futures indicated a higher opening Monday.

“It will be risk-on today it seems, as don’t-know-hummus-from-Hamas optimists were right, and gloomy ‘WW3’ pundits were wrong,” Michael Every, head of Asia financial markets research at Rabobank in London, wrote in a report. “However, there is still a big difference between a risk-on trade and assuming that underlying risks have actually gone away. After all, the Middle East remains a powder-keg.”

History shows that a U.S.-led attack on Syria doesn’t necessarily send investors running for cover. After the previous bombing on April 7, 2017, the MSCI All Country World Index finished the day little changed. And U.S. Treasuries, typically a haven, fell, with yields on 10-year notes climbing 4 basis points.

While the 10-year yield rose 3 basis points to 2.86 percent Monday, it’s still below the four-year high of 2.95 percent reached on Feb. 21. That reflects the lingering geopolitical tension, according to Arqaam Capital.

“Unless it’s a major and a long-term event, the market has gotten numbed to regional geopolitics,” said Abdul Kadir Hussain, the head of fixed income at Dubai-based Arqaam Capital. “However, I would argue that on a global basis, one of the reasons U.S. Treasuries are at these levels is because of global geopolitics and that would include Syria. There is no other reason for the 10-year not to be a lot closer to 3 percent.”

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