As always, our team is staying abreast of the issues that are shaping today's market. Here's our understanding of everything that has been happening with the US and Iran in the last few weeks. If you have any questions or concerns, don't hesitate to contact us.

This morning, President Donald Trump gave a statement regarding the last week of military activity between the United States and Iran. While some saw this activity as a prelude to war, Trump's statement this morning appeared to sail a different tack. Trump struck an uncharacteristically conciliatory tone, and most analysts read today's statement as a step in the right direction.

Brief Summary of Events

A proper history of tensions between the US and Iran would stretch back to the Mossadegh government's nationalization of oil fields in 1951, but here's an extremely brief timeline of recent events:

December 31, 2019: Protestors in Iraq storm the US embassy after a series of airstrikes targeting Kata'ib Hezbollah. While the protestors were able to scale the walls of the compound, the US ambassador was not in the facility and the facility was not evacuated. Critically, the US alleged that Iran was involved in orchestrating the protests.

January 3, 2020: A drone strike near Baghdad International Airport kills Kata'ib Hezbollah leader Abu Mahdi al-Muhandis and nine of his guests, including Iranian military leader Qasem Soleimani. This is seen as a dramatic escalation of US/Iran tensions, as Soleimani was well-known and widely admired within Iran. 

January 5, 2020: Iraqi parliament passes a resolution to request the withdrawal of US troops in Iraq. Since Iraq is still an important base of operations for the US, the legitimacy of the US military's presence there is considered strategically important.

January 8, 2020: Iran retaliates, firing missiles at US military bases in Iraq. The US claims that no US or Iraqi casualties were incurred, and that damage to military infrastructure was manageable.

Trump's statement this morning was his first official statement, but he's also been very active on Twitter. 

What's next for US/Iran?

Heading into this morning's press conference, we saw two possibilities for Trump's statements. Firstly, we considered the possibility that Trump could come out with fire and brimstone, announcing an escalation of military operations against Iran's interests. This would align with Trump's tweet referencing 52 military, industrial, and cultural targets in Iran. 

Secondly, we saw an opportunity for Trump to declare victory, blame the Obama administration and Qasem Soleimani for all the US's problems in the Middle East, and begin the process of de-escalation. We saw this scenario as considerably more likely, because an escalation to a shooting war aligns only with the interests of the hardest of hardliners within the US and Iran. Such a conflict would inflict considerable damage to all involved, and yield no obvious advantages.

• View Donald Trump's full statement here.

Trump appeared to pursue the latter strategy. He announced further economic sanctions on Iran, blamed Qasem Soleimani for everything this side of the US failing to qualify for the 2018 FIFA World Cup, and (perhaps most surprisingly) opened the door to a new US/Iran deal and cooperation between the US and Iran. Should the latter actually materialize, it would be a huge step forward for all involved.

How the market has reacted 

The market reacted fairly dramatically to the assassination of Qasem Soleimani. The prospect of war with Iran caused a significant drop in the S&P 500 and a corresponding hike in oil prices. From Bloomberg, the S&P 500's progress over the last few days:

The assassination of Qasem Soleimani caused a drop, as did Trump's inflammatory "52 targets" tweets, but Trump's conciliatory tone in this morning's conference encouraged a spike. The opposite effect can be observed in oil prices, here measured by WTI:

This largely tracks with how war generally affects the market: oil prices are positively affected by the prospect of war in the Middle East, and US Equities are negatively affected by the prospect of a US war.

Looking forward

Should Donald Trump and Iranian leadership follow the course of deescalation, we would expect volatility in the S&P 500 and oil prices to settle down. Should Donald Trump abandon his conciliatory tone, or if Iranian retaliation continues, we could see oil prices and US equities move dramatically.

In total, we believe that today's statement was a step in the right direction for both Iran and the US. It remains in both parties' best interest to de-escalate, and it appears that both parties are attempting to follow that path.

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Disclaimer: Canaccord Genuity Corp. is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF). The comments and opinions expressed in this commentary are solely the work of the Cash Management Group and Andrew Johns.