US military base in Bahrain targeted in Iranian drone attack

Iran made its second attempt in three days to target Bahrain. The Guardian reported on Sunday that Iran had launched a drone attack on a US military base in the country that day.

Six drones were used to target the US air defence radar facility at Al-Riffa air base in Bahrain, according to Iran’s Islamic Revolutionary Guards Corps (IRGC).

According to Bahrain’s military, its air defence systems intercepted and destroyed the Iranian aerial attacks “before they could achieve their objectives.” Iran had previously launched drones at Bahrain on Friday, marking its first attack against Gulf countries since September.

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

In southern Yemen, an advance by Iran’s Houthi allies against pro-government forces opened a potential route to Aden. Separately, Tehran claimed an oil supertanker had been sunk by a mine in the Strait of Hormuz.

Risk sentiment: key questions

How do “risk-on” and “risk-off” describe financial market sentiment?

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

Which assets signal changes in risk sentiment?

A positive growth outlook typically lifts equities and most commodities, apart from gold, during “risk-on” periods. Greater demand also supports the currencies of major commodity-exporting nations, while cryptocurrencies advance. By contrast, a “risk-off” environment generally favours bonds, particularly those issued by major governments. Gold performs well, and safe-haven currencies including the Japanese yen, Swiss franc and US dollar also benefit.

Currencies that typically gain in “risk-on” markets

During “risk-on” periods, gains are common in the Australian dollar (AUD), Canadian dollar (CAD) and New Zealand dollar (NZD), alongside minor currencies such as the ruble (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, supporting these currencies.

Currencies that typically gain in “risk-off” markets

Periods of “risk-off” sentiment generally support three major currencies: the US dollar (USD), Japanese yen (JPY) and Swiss franc (CHF). The dollar benefits from its role 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. Demand for Japanese government bonds supports the yen: a high proportion of these bonds are held by domestic investors, who are unlikely to sell them even during a crisis. For the Swiss franc, support comes from strict Swiss banking laws that provide investors with enhanced capital protection.