Tensions rise but markets remain calm (for now)

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Quick Fix

Tensions rise but markets remain mostly steady — Mohamed A. El-Erian emails MM on the strike by President Donald Trump that killed Iranian General Qassem Soleimani: “The way Mideast tension escalated puts financial markets in a particularly difficult situation. They recognize the significant increase in geopolitical risk but do not have a good way to price in the when and the what …

“Absent further concrete development, traders’ inclination will be to go back to an approach that has worked well in the last few years: That is, fade the risk off pressures on the dual view of no further tension escalation and/or the repeated willingness of central banks to intervene to repress market volatility.”

MM sidebar: We suggested on Twitter over the long holiday that this strike would not rock markets. It didn’t. But the uncertainty and risk remain very high.

Football sideline — Mo on the Pats losing: “The notion of the Patriots not making yet another strong run for the Super Bowl is as alien to me as my speaking some ancient Greek language or eating foie gras. Yet it has happened somehow.”

The risk ahead — BCA Research Geopolitical Strategist Matt Gertken: “Trump … will not be removed from office by a Republican Senate, his impeachment trial threatens to mar his re-election chances. This is a prime motivation to pursue foreign policy objectives to distract the public and seek policy wins”

GOOD MONDAY MORNING — Is it Monday for real? Does anyone know for sure? Glad to be back with you. Email me at [email protected] and follow me on Twitter @morningmoneyben. Email Aubree Eliza Weaver at [email protected] and follow her on Twitter @AubreeEWeaver.

Driving the Day

GOLD SURGES —Via Bloomberg: “Stocks declined and gold, oil and Treasuries advanced in the wake of escalating Middle East tensions as Asian financial markets returned to full strength following New Year holidays.

“Gold surged to the highest in more than six years and Treasury yields ticked lower amid fallout from the U.S. killing of a top Iranian military commander in Iraq. Oil extended Friday’s climb. The yen matched a three-month high, though pared earlier gains. Japanese, Hong Kong and South Korean equities fell, and U.S. and European futures retreated.”

MORE ON THE IRAN CRISIS — Pantheon’s Ian Shepherdson: “Iran right now is reeling from the assassination, but the leadership is dominated by hardliners and the question is how, not whether, they will respond. For markets, the key issue is the impact of the Iranian response on oil prices. Our base case is that a full-blown war between the U.S. and Iran is unlikely”

TRUMP VS. IRAN — Our Rishika Dugyala: “Trump on Sunday tweeted that his social media posts ‘serve as notification’ to Congress that the U.S. will retaliate against any attack from Iran — and the House Foreign Affairs Committee wasn’t having it. …

“Some Democratic lawmakers have expressed frustration with the Trump administration’s secrecy in carrying out military action that killed … Soleimani. The administration did not give Congress a heads up before executing the strike. On Saturday, The White House did notify Congress of its action, as required under the 1973 War Powers Act”

GOP FOR BIDEN? — Via J.W. Verret: “I am the very first person, and definitely the first former Trump Staffer, to start a Republicans for Biden website to raise money for Biden and rally the 10-15% of Rs who lean our way.”

SPEAKING OF BIDEN … Our Sarah Ferris: “Joe Biden has landed endorsements from several House Democrats representing some of the toughest battleground districts in the country as he works to prove his electability in swing states.

“Biden’s presidential campaign announced on Sunday that it had won the backing from Reps. Conor Lamb and Chrissy Houlahan of Pennsylvania and Elaine Luria of Virginia — three battleground centrists with military backgrounds — as he seeks a breakout moment in the purple state of Iowa next month.”

Markets

ICYMI: STOCKS FALL AFTER DEATH OF IRANIAN GENERAL — AP’s Alex Veiga: “Stocks fell broadly on Wall Street and oil prices surged … after a U.S. strike killed a top Iranian general in Iraq, raising tensions in the Middle East. The selling, which lost some momentum toward the end of the day, ended a five-week winning streak for the S&P 500 a day after the benchmark index hit its latest record high. …

“Technology, financial and health care stocks accounted for much of the selling. Companies that rely on consumer spending also fell, along with airlines. Several energy stocks got a boost from higher oil prices. Defense contractors also notched gains.”

HAPPY 2020 FORECASTS SENT AWRY AMID IRAN TENSION — Bloomberg’s Netty Idayu Ismail, Lilian Karunungan and Sydney Maki: “Put those 2020 forecasts for emerging markets on hold. The goalposts have just moved. The U.S. assassination of … Soleimani has sent such a shudder through risk assets, it’s managed to eclipse much of the optimism stemming from the impending signing of an initial trade deal between the U.S. and China.

“Middle Eastern stock markets nosedived on Sunday, continuing a selloff that began at the end of last week as news emerged that Soleimani had died in a drone attack in Iraq ordered by President Donald Trump, raising U.S.-Iran tension to a new level. Developing-nation stocks, currencies and bonds dropped by the most since November on Friday, and analysts are expecting Asian markets to remain on the backfoot on Monday.”

Fly Around

BERNANKE: FED HAS MANY TOOLS TO FIGHT DOWNTURN — Reuters: “The U.S. Federal Reserve still has enough clout to fight a future downturn, but policymakers should state in advance the mix of policies and policy promises they plan to use to get the most bang for their buck, former Fed chief Ben Bernanke said on Saturday.

“In an address to the American Economics Association, Bernanke pushed back on the notion that central banks have lost influence over the economy, and laid out his thoughts about how the Fed in particular could change its monetary policy ‘framework’ to be sure that is not the case.”

FEW BANK FAILURES COULD BE WARNING FOR FINANCIAL SYSTEM — WSJ’s Andrew Ackerman: “Times are good for U.S. banks. The industry is highly profitable, lending is up and the number of problem institutions — those found to have deficiencies in their businesses — is the lowest since early 2007, according to the [FDIC]

“Unusually, not a single bank failed in 2018, and just four small lenders have gone under since the end of May 2019. Yet some bank analysts and former regulators say the very paucity of failures may be a sign that hidden risks are building.’

FED FACES NEW TRADE-OFFS, HUNTS FOR NEW MODEL — Reuters’ Howard Schneider and Ann Saphir: “An unprecedented combination of low U.S. unemployment, weak inflation and low interest rates has the U.S. Federal Reserve grappling with how to fight the next recession, as experts debate new approaches to financial regulation as well as a fuller overhaul of Fed strategy.

“At a three-day conference in San Diego on an array of economic topics, one stood out: The textbook view of central banking, where low unemployment produces unwanted inflation that monetary policymakers can counter with interest-rate hikes, is at least badly hobbled if not fully broken.”

ZOMBIE FIRMS AREN’T FEEDING OFF LOW RATES, CHEAP MONEY — Bloomberg’s Frances Schwartzkopff: “There’s no end of theories on all the ways in which negative interest rates are hurting economies. But in Denmark, where the policy has existed longer than anywhere else, one fear seems to have been put to rest.

“The central bank in Copenhagen, which uses negative rates to keep the krone pegged to the euro, says its research shows that the number of so-called zombie firms has fallen amid record monetary stimulus. That goes against the conventional wisdom, which assumes that unnaturally low borrowing costs prop up companies that would collapse in more normal times.”

TRANSITIONS — Per release: “ABA President and CEO Rob Nichols has been elected to a two-year term as chairman of the International Banking Federation (IBFed) … IBFed is an international forum for considering regulatory and economic issues affecting banks worldwide.”