Markets learn to live with terrorism

The West would like now to enter negotiations with Iran for a better future relationship but would expect Iran to wind down its support for terrorist groups.

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The news has been dominated so far in 2020 by the conflict between Iran and the US. Donald Trump changed western policy when he arrived in the White House, regarding the nuclear agreement with Iran as unsatisfactory in its own terms whilst failing to tackle Iran's encouragement of terrorist movements and rebel forces in several Middle Eastern states. He decided to try to force a diplomatic response from Iran by stiff sanctions, particularly targeted on Iranian oil sales.

Iran countered by working through various violent groups in Syria, Iraq, Lebanon and Yemen against the US and her allies. The US President eventually responded to Iran's military provocations by killing General Soleimani, the architect of a scheme to create a crescent of supportive states to Iran through asymmetric warfare and rebel insurgencies.

Iran replied with a missile attack on US bases in Iraq which fortunately killed no-one. Markets think this should be the end of the military escalation, as the US has indicated it regards the matter as over and the moderate voices in Iran imply it has done what they thought they needed to do by means of retaliation.

Boeing crash

The situation is further complicated by the tragic loss of the Ukrainian airliner shortly after take-off from Teheran, with all 176 passengers killed. The West now thinks there is evidence that it was shot down by an Iranian missile, probably by mistake. Iran denies this and has been suggesting it was some mechanical failure on the aircraft. Iran has a black box but is not yet willing to share its contents with international investigators.

The West would like now to enter negotiations with Iran for a better future relationship but would expect Iran to wind down its support for terrorist groups and to co-operate on matters like the crashed airliner. Iran, in public, is hostile to talks whilst sanctions remain in place, but might undertake unofficial exploratory talks. It looks as if we can get through the crisis without a major war between Iran and her allies and the US which is why markets have shrugged off the news so far.

The situation is, however, tense and fluid and one side or the other could go too far with an action which triggered something worse. Iran's allies in Iraq are pressing for the withdrawal of US and allied troops from that country, where they help keep the peace at the request of the Iraqi government. The West is seeking clarification of the government's position and is minded to stay if the request remains in place given the Iranian pressures now operating on that country.

Boeing culture under scrutiny

It has not been a good week for Boeing. The growing belief that the crash was not the fault of the three-year-old Boeing 737 could not offset the bad news coming out about the culture at the plane maker over the issues of safety and performance which have grounded the newer Boeing 737-Max. The cessation of production of these planes this year owing to the continued ban on using them will make a dent in US industrial output and exports.

This year should see some recovery in economic activity as the monetary easing of late 2019 has its impact. The main governments and Central Banks want to promote more growth and get inflation up to 2% which is still a positive for shares.

For more information please get in touch 020 3504 8307 or email us at madeforyou@charles-stanley.co.uk 

John Redwood is Chief Global Strategist at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.

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