WTI futures spiked nearly 5% overnight in the wake of a US drone strike on Baghdad Airport which killed Iranian military commander Qasem Soleimani.  It is a dangerous escalation in the US conflict with Iran which broadened when Trump alarmed US allies by pulling out of the Iran nuclear deal last May.

We argued at the time, as did many, that Trump’s actions put the US on the path to a potential shooting war. The assassination of Soleimani clearly amplifies the risks. So far, oil prices have pushed only slightly above the levels reached after the nuclear deal pullout and the Saudi Aramco plant was attacked in September.  But, this is obviously a more serious geopolitical development. From an economic standpoint, a sharp rise in the price of oil further complicates the already thorny inflation problem facing markets – setting up a showdown between Fed hawks and doves in January.

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ES reacted sharply overnight, but has reached nominal channel line support. VIX has pushed above its SMA200 again, but remains far short of the TL resistance at 16.97. That and the SMA200 at 15.03 will represent the battle lines for bulls today as higher oil and gas prices are no longer operating as bullish algo levers.Although CL has obviously broken out, don’t underestimate the determination of central banks to put a lid on prices and squelch volatility.The problem has been more easily contained in RB, which has already pulled back below its SMA200.

A reminder of the big picture for CL. All bets are off, though, if carriers, F-22s and tanks get involved.Outside the equity funhouse, the risks are a little more apparent. ZN has rallied, leaving its SMA200 grasping for a tag.

It is a few bips from breaking out of its last TL of overhead resistance. Look for TNX to finally backtest its TL from Sep 3.

The drop in the 10Y has compressed the 2s10s for the time being, seeing it drop from 35 to 29 bps. Another beneficiary of the increased risk is gold, which has popped about 1.4%. For details on targets, please refer to yesterday’s update.