DIGEST – Market attention remained squarely on the Middle East yesterday, though initial risk-aversion pared as the day wore on, with equity dip buyers out in force again. Headline-watching will remain the order of the day today.
WHERE WE STAND – Participants maintained a laser-like focus on geopolitical developments yesterday, as conflict in the Middle East continued, and headline noise remained deafening.
Clearly, we all hope that the situation calms in short order, and that hostilities are brought to a relatively swift end. At this stage, however, such a conclusion seems unlikely, at least in the short-term, with rhetoric from both the US-Israeli, and Iranian, sides indicating preparedness for a prolonged conflict, and thus far signalling little desire to de-escalate or negotiate.
Crucially, though, the Iranians have signalled that oil infrastructure of countries within the Gulf are not targets of their military strikes, while the Strait of Hormuz remains open, even if the majority of tankers are at a standstill nearby, awaiting confirmation they will receive clear passage, as well as appropriate insurance coverage. All that allowed crude benchmarks to pare around a third of the opening gap higher, and for Brent to pullback beneath the key $80bbl mark, as some degree of the extreme risk premium priced at Sunday’s open was removed.
Besides Brent trimming gains, there were two distinct themes dominating the price action yesterday.
Firstly, there was a general desire to preserve capital, as participants sought havens in which to shelter from geopolitical news flow, and batten down the hatches to a degree. For most, gold was the haven of choice, with bullion briefly taking a look above $5,400/oz once again before paring a chunk of the gains, while the dollar also attracted inflows, advancing around 1% against a basket of peers. In case it were in any doubt, this again proves that, when push comes to shove, the greenback is still the ‘cleanest dirty shirt’ in the FX universe; so much for the ‘Sell America’ trade!
Interestingly, the Swissie didn’t attract the haven inflows that I’d expected, though this was largely as a result of the SNB noting their ‘increased preparedness’ to intervene in the FX market in light of the international situation. That jawboning clearly dented the attractiveness of hiding out in the CHF, while the JPY also faced some fairly chunky headwinds, largely a reflection of Japan being a significant energy importer.
This brings me to the second distinct theme, where participants traded geopolitical risk through the lens of a commodity shock. This was evident not only via that JPY weakness, but with other big energy importers, such as the GBP, also seeing notable downside.
Such a theme was even more obvious in the rates space, with Treasuries – and govvies across DM – trading substantially softer on the day across the board. The belly underperformed, largely unwinding the outperformance seen last week, with the benchmark 10-year Treasury yield in turn poking its head back above 4.00%. The prices paid metric in the ISM manufacturing survey rising to its highest level since June 2022 didn’t help much here either.
I’d argue that a lot of the pressure here, as well as the hawkish repricing in G10 STIR curves, is probably overdone, considering not only that an energy price shock will only prove inflationary if it is sustained, but also bearing in mind that policymakers almost always look-through the impact of energy prices in any case.
Amid all that, equity dip buyers wasted no time in entering the fray, with both spoos and the NQ paring opening declines of over 1%, to end the day in the green. Although stocks here in Europe did end the day in the red, largely a function of the aforementioned commodity shock, I think this on the whole speaks to participants re-focusing away from headline noise, and instead reflecting on what remains a robust fundamental backdrop for risky assets, amid strong earnings growth, and a robust underlying economy. Obviously, a degree of caution may prevail in the short-term, though I remain in dip-buying mode, as the ‘path of least resistance’ should continue to lead higher over the medium-run.
Lastly, I’ll reiterate what I said yesterday, in that we are already seeing the ‘half-life’ of geopolitical headlines shorten rather significantly, with market attention increasingly turning towards the potential for ‘off ramps’ and ‘de-escalation’. Though we are not at that stage yet, there is still little that leads me to believe that this will prove different to the usual manner in which geopolitical events tend to shake out for markets. Namely, that this will prove a short-term shock, not a trigger for a durable or longer-lasting change in the overall direction or theme.
LOOK AHEAD – I’ll go through it anyway, but with geopolitics the focus, I can almost guarantee that today’s calendar events won’t matter one bit.
Last month’s ‘flash’ eurozone inflation figures are the only notable data release, with both headline and core CPI metrics set to remain unchanged at 1.7% YoY and 2.2% YoY respectively, adding further evidence to the case for the ECB’s easing cycle to be at an end.
Elsewhere, a handful of central bank speakers are due, including influential Fed voter Williams, and BoJ Governor Ueda, though neither is likely to say too much about the impact of recent events. Meanwhile, on the earnings front, notable reports come from the likes of Target (TGT) before the open, and CrowdStrike (CRWD) after the close.
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