Here’s Why Stocks Plunged, Oil Prices Surged After U.S. Airstrike Kills Top Iranian General

While the markets’ usual knee-jerk reactions to geopolitical shocks tend to fade, “this particular development is different than the others,” Adam Crisafulli, founder of Vital Knowledge, said in a note on Friday

Photo: Depositphotos.com/Bumble-Dee

Topline: Global stock markets pulled back from their strong start to the new year and oil prices surged on Friday, following an overnight U.S. airstrike that killed Iran’s most senior general and significantly inflamed tensions in the Middle East.

  • Major General Qassem Soleimani, one of Iran’s top military leaders, was killed in a drone strike at Baghdad International Airport on Thursday night, the Pentagon confirmed, sparking strong condemnations from the Iranian government—who vowed to retaliate for the action.
  • The escalating geopolitical tensions in the Middle East quickly derailed global stock markets’ strong start to 2020: U.S. stocks retreated from the fresh record highs that they hit on Thursday, although shares of major energy companies rose in early trading alongside the surge in oil prices.
  • U.S. stocks plunged on Friday following the news, with the S&P 500 down almost 0.7% and the Dow down nearly 250 points, or 0.8%, in morning trading.
  • The escalating tensions between the U.S. and Iran also weighed on other global stock markets: The Stoxx Europe 600 fell by 0.4% and Hong Kong’s Hang Seng index was down 0.3%, for example.
  • While stocks retreated from their early 2020 rally, oil prices surged more than 4%, hitting an 8-month high of almost $70 per barrel. 
  • Analysts are concerned that the U.S. airstrikes will lead Iran to retaliate by attacking oil infrastructure of U.S. allies in the Middle East, like Saudi Arabia, according to CNBC. Such a retaliation would disrupt global oil supply chains and likely also send the prices oil skyrocketing further.

Crucial quote: While the markets’ usual knee-jerk reactions to geopolitical shocks tend to fade, “this particular development is different than the others,” Adam Crisafulli, founder of Vital Knowledge, said in a note on Friday. Striking Soleimani is the “most consequential decision made by Trump thus far,” while the S&P 500’s high valuation multiple “doesn’t leave it with much capacity to absorb bad news.”

Key background: President Donald Trump ordered the strike that killed Soleimani, the leader of Iran’s Islamic Revolutionary Guards’ foreign wing—designated a terrorist organization by the U.S. government, late on Thursday. This latest action by the Pentagon comes as a response to a New Year’s Eve attack by Iran-backed militias on the U.S. embassy in Baghdad.

Iran harshly condemned the airstrikes and vowed to retaliate: Iranian Foreign Minister Mohammad Javad Zarif said on Twitter that the U.S. “bears responsibility” for what he called an “extremely dangerous and foolish escalation.” Amid the promises of Iranian retaliation, the U.S. embassy issued a security alert on Friday urging all American citizens to “depart Iraq immediately.”

Forbes.com

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