U.S. Stock Futures Erase Losses After Initial Iran Strike Shock

(Bloomberg) -- U.S. stock index futures erased their losses after tumbling in the wake of an Iran missile strike at the American bases in Iraq.

Contracts on the S&P 500 Index were up less than 0.1% as of 10:34 a.m. in London, rallying from a decline of as much 1.7% after President Donald Trump said in a tweet that “All is well” and Iran’s foreign minister said on Twitter the country had “concluded proportionate measures in self-defense”. Futures on the Nasdaq 100 also turned around to trade little changed, while those on the Dow Jones Industrial Average were down just 0.2%.

The Stoxx Europe 600 Index retreated 0.2% after falling as much as 0.6%, with energy one of only two sector subgroups to gain, in response to higher crude prices. Equity gauges in Asia retreated. Iraq said it had received verbal notice from the Iranians prior to the missile strikes and there appeared to be no casualties.

“The restrained response from the U.S. had been a change in tune inviting the paring back of the knee-jerk reaction in the immediate aftermath,” said Jingyi Pan, market strategist at IG Asia Pte. “Once again, this may well be a long-drawn issue that continues to see twists and turns to the risk-sensitive assets.”

The initial sell-off shattered an uneasy calm that had prevailed on American equities markets this week even as Iran repeatedly threatened to retaliate after the U.S. killed a top general Friday. Wednesday’s escalation rekindled the flight to safety after a two-day reprieve, sending gold briefly above $1,600 an ounce and rattling equity markets around the globe. Oil surged.

The strikes heightened fears that the situation will widen into a broader conflict that could ripple across global financial markets. Trump had vowed a quick and overwhelming response to any Iranian attacks.

“It is important to note that President Trump was very clear that the U.S. would deliver a heavy-handed response to any Iranian retaliation,” Michael O’Rourke, JonesTrading’s chief market strategist, wrote to clients. “Futures should not only be reacting to the Iranian attack, but also to the clear escalation that will be the impending U.S. escalation.”

The S&P 500 is coming off one of its best years of the bull market, rising 29% in 2019 amid a cooling of trade tensions, signs of rising global growth and concerted central bank easing. Risk markets had looked past geopolitical tensions, from North Korea to the Middle East, on speculation central banks stood ready to continue supporting growth. Volatility that had remained tepid throughout the latter part of the year is now likely to spike higher.

“Clearly a myriad of uncertainties remain around a potential U.S. counter strike and any further reprisals which will subdue risk appetite and see volatility whipsaw markets once again,” said Eleanor Creagh, a strategist at Saxo Capital Markets.

--With assistance from Filipe Pacheco.

To contact the reporters on this story: Heejin Kim in Seoul at hkim579@bloomberg.net;Sarah Ponczek in New York at sponczek2@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Naoto Hosoda, Paul Jarvis

©2020 Bloomberg L.P.