Stock Futures Dip and Volatility Expectations Spike as US–Iran Tensions Buffet Markets

Trader Gregory Rowe (L) and specialist Michael Pistillo work on the floor of the New York Stock Exchange on Dec. 5, 2019. Richard Drew/AP Photo

U.S. stock index futures fell from their record highs on Jan. 6 as growing tensions between the United States and Iran sparked a pivot to safer assets, with safe-haven gold hitting six-year highs.

After ending 2019 on a strong note, Wall Street’s main indexes have dipped after the killing of a top Iranian general by the United States last week raised the threat of a new Middle East flare-up.

Dow Jones futures pulled back 0.62 percent, while S&P 500 futures sank 0.56 percent, according to Live Index data.

Volatility futures for the S&P 500 (S&P 500 VIX FUTU), an instrument that lets investors bet on expectations of rising or falling volatility independent of stock prices, climbed by 4.6 percent.

“Everyone got comfortable in that fact that the truce in the trade war had come through and the outlook for 2020 looked a little bit better and then we had another geopolitical reminder come through,” said Suncorp Group Financial Market Strategist Peter Dragicevich, Bloomberg reported. “It’s going to be a big driver of markets in the short term.”

Meanwhile, the cost of insuring against a potential debt default by Saudi Arabia soared by over 16 percent since the U.S. drone strike killed Iranian commander Qassem Soleimani.

President Donald Trump ordered a strike last week against Soleimani, the architect of Tehran’s overseas military operations, including ones targeting Americans. The Iranian general was killed early on Jan. 3 by a drone-fired missile that struck his convoy at the Baghdad airport.

Revolutionary Guard Gen. Qassem Soleimani (C) attends a meeting in Tehran, Iran, on Sept. 18, 2016. Office of the Iranian Supreme Leader via AP, File

Before the attack, the U.S. intelligence community said it had reason to believe that Soleimani was involved in “late stage” planning to strike Americans in multiple countries.

Iranian officials responded to the strike by threatening to retaliate.

“Some 35 U.S. targets in the region, as well as Tel Aviv, are within our reach,” Senior Revolutionary Guards commander Gen. Gholamali Abuhamzeh was quoted by Tasnim news agency as saying. He also raised the prospect of possible attacks on U.S. destroyers and other warships in the Strait of Hormuz.

Trump then said the United States had “targeted 52 Iranian sites” in response to the retaliatory threats and warned Iran not to attack “any Americans or American assets” or targets would be “hit very fast and very hard.”

The mounting tensions have also impacted markets in the Middle East.

Stocks in the Persian Gulf plunged in trading on Jan. 5, with shares of oil giant Saudi Aramco falling 1.7 percent to their lowest level since listing in December in a record initial public offering.

The Kuwaiti index, the best performer in the region in 2019, fell almost 4.1 percent, while Saudi stocks plunged 2.2 percent.

“A U.S.-Iran war could shave 0.5 percentage points or more off global GDP, mainly due to a collapse in Iran’s economy, but also due to the impact from a surge in oil prices,” Jason Tuvey, senior emerging markets economist at Capital Economics, said in a note last week.

Oil prices jumped to $63.05 a barrel on Jan. 3, their highest level in more than three months, after Soleimani’s killing sparked fears that conflict in the region could disrupt global oil supplies.

Reuters contributed to this report.