Israeli Prime Minister Benjamin Netanyahu has raised alarms about Iran boosting its production of ballistic missiles following prior Israeli attacks. Plans are being made to inform then-US President Donald Trump about possible actions against Iran, as reported by sources in the know. At the time of this report, West Texas Intermediate (WTI) crude oil prices climbed by 0.54%, reaching $56.84 per barrel. Gold also saw an increase of 0.59%, hitting $4,365.

Market Terms and Trends

In finance, the terms “risk-on” and “risk-off” describe how willing investors are to take risks. In a “risk-on” market, there’s more optimism, leading to more purchases of riskier assets. Conversely, “risk-off” markets create caution, favoring safer assets. Typically, “risk-on” conditions boost stock markets and commodities, except for gold, and strengthen the currencies of commodity-exporting nations. During “risk-off” times, bond prices usually rise, especially government bonds, while gold becomes more appealing. Safe-haven currencies like the yen, franc, and dollar also gain value. In “risk-on” situations, the Australian, Canadian, and New Zealand dollars often rise in value, along with currencies like the ruble and rand. During “risk-off” moments, the US dollar, Japanese yen, and Swiss franc tend to appreciate because they are considered safer. The escalating tension between Israel and Iran is a significant concern for the markets as we approach the new year. We are witnessing a typical “risk-off” scenario, indicating increased geopolitical uncertainty in the Middle East. This situation suggests we should brace for more market volatility in the weeks ahead.

Investment Strategies in Volatile Times

We should consider taking long positions in oil derivatives, such as futures or call options on WTI and Brent crude. It’s worth remembering that Brent crude prices soared past $90 a barrel in April 2024 during similar tensions. With WTI prices currently near $88, any disruption in the Strait of Hormuz could easily push prices back into the triple digits. Market anxiety is likely to rise, making long positions on the VIX index a smart protective move. Historically, the VIX, which is currently around a stable 14, surged over 35% in just a few days during last year’s Israeli-Iranian exchanges. Buying VIX call options or futures could provide crucial protection if broader stock markets start to decline. The emerging scenario points toward a flight to safety, benefiting traditional safe-haven assets. We should consider purchasing gold futures; gold rallied over 8% to new highs during tensions in early 2024. In the currency markets, this means supporting the US dollar and Japanese yen against commodity currencies like the Australian dollar. On the flip side, we should expect weakness in equity index futures. A risk-off environment will likely press down on markets such as the S&P 500, which has been steadily climbing since the inflation fears of 2023 eased. It might be prudent to buy put options on major indices or reduce overall long positions in stocks. Create your live VT Markets account and start trading now.

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