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

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

After ending 2019 on a strong note, Wall Streets 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. “Its 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 a U.S. drone strike killed Iranian commander Qassem Soleimani.

President Donald Trump ordered a strike last week against Soleimani, the architect of Tehrans 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 Baghdads airport.

Qassem Soleimani
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.

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