Iran’s Qeshm Island near Strait of Hormuz hit by US strikes — WSJ

Iran’s Qeshm Island came under attack from the United States (US) on Monday, the Wall Street Journal (WSJ) reported, citing US officials. The operation was the latest in a series of limited strikes Washington has conducted secretly against Iran in recent weeks.

Before the attacks, US President Donald Trump had downplayed the prospect of renewed war with Iran following Tuesday’s midterm elections.

According to Press TV, Iran’s Islamic Revolutionary Guard Corps (IRGC) said it had intercepted and brought down two US MQM-170 drones south of Qeshm Island in the Strait of Hormuz. It also said the 55th US MQ-9 drone had been destroyed east of the Hormuz Strait.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

How is the market responding?

West Texas Intermediate (WTI) is trading at $95.65 at the time of writing, a gain of 0.71% for the day.

Risk sentiment: Key questions answered

How do "risk-on" and "risk-off" describe sentiment in financial markets?

Investors’ willingness to take on risk over a given period is commonly described in financial markets using the terms “risk-on” and “risk off”. Optimism about the future encourages investors in a “risk-on” market to buy riskier assets. By contrast, concerns about the outlook prompt investors in a “risk-off” market to ‘play it safe’. They favour lower-risk assets offering greater certainty of a return, even if that return is relatively modest.

Which assets offer clues to changes in risk sentiment?

A favourable growth outlook typically supports equities and most commodities, apart from gold, during “risk-on” periods. Higher demand also lifts the currencies of major commodity-exporting countries, while cryptocurrencies advance. When markets turn “risk-off”, bonds typically gain, particularly those issued by major governments. Gold performs well too, alongside safe-haven currencies such as the Japanese yen, Swiss franc and US dollar.

Why do certain currencies gain in "risk-on" markets?

A “risk-on” environment generally favours the Australian dollar (AUD), Canadian dollar (CAD) and New Zealand dollar (NZD), along with less widely traded currencies such as the rouble (RUB) and South African rand (ZAR). Growth in these economies depends heavily on commodity exports. As investors anticipate stronger economic activity and greater future demand for raw materials, commodity prices tend to increase during risk-on periods, supporting these currencies.

Why do investors favour certain currencies in "risk-off" markets?

During “risk-off” periods, the US dollar (USD), Japanese yen (JPY) and Swiss franc (CHF) are the major currencies that generally strengthen. The dollar benefits from its status as the world’s reserve currency and from crisis-driven purchases of US government debt. Investors regard that debt as safe because the world’s largest economy is unlikely to default. The yen gains as demand for Japanese government bonds increases: a large share of these bonds is held by domestic investors who are unlikely to sell them off, even during a crisis. The Swiss franc draws support from Switzerland’s strict banking laws, which provide investors with greater capital protection.