Futures, Bitcoin Jump, Oil Drops As Markets Move Beyond This Weekend's Scripted Military Exchange Between Iran And Israel

Following the emotional rollercoaster of this weekend geopolitical "straight to DVD" soap opera, in which Iran pretended to retaliate to Israel's embassy bombing with an attack that was meant to be a dud (and succeeded), which in turn was followed by an even more dramatic de-escalation by Israel in which after much saber rattling Netanyahu did...nothing, futures and yield are predictably higher, while oil is lower. That's right: after digesting the weekend's news and realizing that what just happened was one giant farce, global markets are broadly higher (except for Asia which is always a few steps behind), with European stocks ticking higher and US rebounding from Friday's 1.5% selloff in the S&P 500. As of 7:30am, S&P futures were 0.5% higher with Nasdaq futs rising 0.6%; Treasuries slipped along with the dollar. West Texas Intermediate crude dropped below $85 a barrel, while base metals rallied with Aluminum at one point surging more than 9% after Russian supply was hit by US and UK sanctions. Gold reversed Friday's losses to rise above $2,350 an ounce and bitcoin - which was the weekend's only operating market and saw the initial risk-off reaction - reversed all losses and is back to unchanged. Today, the macro focus will be Retail Sales release. Feroli expects headline Retail Sales to print +0.3% vs. +0.4% survey vs. +0.6% prior. China will release key macro data at 10pm ET tonight.

In premarket trading, most of megacap tech stocks were higher: META +1.2%, NVDA +1.12%, MU +96bp, MSFT +62bp; however Apple slipped after iPhone shipments slid a worse-than-projected 10% in the first quarter, as sales flagged in China. The company shipped 50.1 million handsets, IDC said, its worst year-on-year drop since Covid lockdowns in 2022.  Banks are also mostly higher, rebounding from Friday’s JPMorgan-driven selloff, with Goldman rising after reporting solid results. Here are some other notable premarket movers:

• Astera Labs shares advance 1.7% after a majority of brokers initiated coverage on the chipmaker with buy-equivalent recommendations.
• Coupang shares rose 1.6%, extending Friday’s gains. Citi upgrades its rating to buy from neutral, saying a recent increase in membership fee by the South Korean e-commerce firm indicates management’s will to manage profit margins.
• Reddit shares gain 1.3% as the social-media company is initiated with neutral-equivalent ratings at JPMorgan, Morgan Stanley and Goldman Sachs. Analysts said the stock is fairly valued.
• Salesforce fell 2.5% after Bloomberg reported that the Marc Benioff-led company is targeting Informatica to boost data capability, according to people familiar with the matter. Some analysts note that such a deal may draw regulatory scrutiny.

While some nerves are still running high given the possibility that Israel might retaliate after Iran fired a barrage of missiles and drones over the weekend - but it won't since the whole operation appears to have been orchestrated and scripted with Biden's interests to keep oil prices low in mind - investors also took comfort after the Iranian mission to the United Nations said the issue “can be deemed concluded.” The US and other nations also called for restraint in an effort to head off a full-blown regional war.

“It’s right to price more geopolitical risk premia into assets, but at the end of the day equity markets are still only about 2% off all time highs,” said Timothy Graf, head of EMEA macro strategy at State Street. “This was a well telegraphed geopolitical development. A lot of the bad news is in the price already.”  

In recent days, markets had been rattled by the threat of a strike and counter-strike cycle in the Middle East, which could push drive energy prices higher at a time when policymakers are still struggling to bring down inflation. But for now, traders said the situation seems contained, and furthermore with the worst of the exchange already priced in, no wonder that oil is actually lower today.  Furthermore, the "assault" caused minimal damage and no fatalities as almost all the projectiles were intercepted. Almost as if it was Iran's intention to do zero harm. Still, the deep state was a winner, and the tensions fueled gains in an index of defense shares compiled by Goldman Sachs. Dassault Aviation SA and Saab AB rose more than 2%. Shares in Leonardo SpA, Thales SA, BAE Systems Plc and Rheinmetall AG advanced at least 1%.

Meanwhile, warnings season continues today with Goldman Sachs and Charles Schwab reporting Q1 results. With investor positioning looking “very stretched” and indexes not far from all-time highs, it’s unlikely that an upbeat earnings season can keep powering stocks higher, according to JPMorgan Chase strategists, although they have been bearish since the mid 3000s so one can ignore them.  “We need to see clear earnings acceleration in order to justify current equity valuations, which we fear might not come through,” Mislav Matejka wrote in a note, hoping that one week he - and his Croatian compatriot Marko Kolanovic - may even be right.

Elsewhere, aluminum surged by a record on the London Metal Exchange as traders responded to new US and UK sanctions that banned deliveries of Russian supplies produced after midnight on Friday. The restrictions on key industrial metals — aimed at curbing President Vladimir Putin’s ability to fund his war machine — are unlikely to stop Russian sales but inject significant uncertainty into commodities markets that have already been reshaped in the aftermath of Russia’s invasion of Ukraine.

European stocks also gained: the Stoxx 600 rose 0.3%, as investors wager that the conflict between Iran and Israel won’t escalate further. Industrials and autos lead sector gains while energy has the largest declines as Brent falls back below $90.  Here are some of the biggest movers on Monday:

• Defense stocks are climbing after Iran fired drones and missiles against Israel on Saturday evening, marking a potentially much more dangerous phase in the region
• Temenos leaps as much as 19% after the software company said an independent examination found allegations by short-seller Hindenburg Research were “inaccurate and misleading”
• Prysmian jumps as much as 6.2% to a record high after the cable maker said it would acquire US-based firm Encore Wire, in a deal that analysts say will help boost its US exposure
• Siemens rises as much as 3.4% and Atlas Copco is up as much as 3.6% after both were upgraded to buy at Bank of America in a review of the European capital-goods sector
• Adidas rises as much as 4.3% after Morgan Stanley double-upgrades to overweight, with growth in topline momentum now seen outweighing risks to the equity story
• Inchcape rises as much as 4.2% after the auto distributor agreed to sell its UK retail operations and use some of the proceeds to fund a buyback
• Fortnox gains as much as 6.1% after the small-business accounting platform was upgraded to buy from hold at SEB
• ISS gains as much as 5.6% after Goldman Sachs upgraded its recommendation to buy from neutral, noting valuation is at historic lows
• Galp declines as much as 2% after the energy company’s trading update revealed lower-than-expected production in Brazil and below-consensus upstream, according to Morgan Stanley analysts
• Stoxx 600 Energy Index drops as much as 1.7% as oil shrugged off Iran’s unprecedented attack. Brent eased on speculation that the conflict would remain contained
• Pagegroup falls as much as 6.7% after the recruitment consultant’s first-quarter results, with Morgan Stanley highlighting an uncertain environment

Earlier in the session, Asian equities fell in delayed action tracking Friday's US slump, with a key benchmark touching a six-week low, as Middle East tensions hurt global risk sentiment. The MSCI Asia Pacific Index slid as much as 1.2%, to its lowest level since March 1. Technology stocks including TSMC, Samsung and Alibaba were among the biggest drags on the gauge, which was poised for a fourth-straight day of losses, its longest losing streak since October. The drop tracked declines in US stocks and a surge in the dollar Friday on the flare-up in geopolitical risks. Tensions ratcheted higher over the weekend with Iran’s unprecedented attack on Israel. Concerns over possible escalation come on top of pushed back expectations for Federal Reserve interest rate cuts after hotter-than-expected CPI data. 

• Hang Seng and Shanghai Comp. were mixed as the mainland bucked the trend after recent disappointing trade data from China added to the case for policy support measures. Participants now await tomorrow's GDP and activity data, while the PBoC provided no surprises and maintained the 1-year MLF Rate at 2.50%, as expected.
• Nikkei 225 was the worst hit and briefly dipped below 39,000 but recovered some of the losses with the help of a weaker currency.
• ASX 200 was pressured with underperformance in gold miners and tech, while sentiment was also not helped by the recent surprise contraction of imports by Australia's largest trading partner.

“We think the specter of sticky US inflation that raises risk of a hawkish repricing higher in rates/yields, higher oil prices amid rising geopolitical uncertainty in the Middle East and a stronger USD create a potent mix where Asian stocks could struggle – at least in the near term,” Nomura strategists including Chetan Seth wrote in a note.

In FX, the Bloomberg Dollar Index steadied Monday after posting a three-day advance; the yen is the weakest of the G-10 currencies, falling 0.4% versus the greenback. “The dollar will be the beneficiary should tensions further escalate, even more so than the yen,” said Carol Kong, strategist at Commonwealth Bank of Australia in Sydney.

In rates, treasury futures remain under pressure, with cash yields cheaper by as much as 5bp for intermediates, after Friday’s haven bid abated during Asia session and European morning on prospect that diplomatic efforts will prevent escalation of conflict between Iran and Israel. Treasury 10-year yields around 4.57% are near top of Friday’s range. Gilts lag by additional 2bp in the sector and underperform across core European rates. US curve spreads are little changed. Bunds and gilts also fall.

In commodities, WTI crude oil futures are down about 0.9% at around $85/barrel after topping $87.60 Friday. Spot gold rises 0.2% while aluminum and nickel climb as traders responded to new US and UK sanctions that ban deliveries of Russian supplies.

On today's US economic calendar, we have the April Empire manufacturing and March retail sales (8:30am), February business inventories and April NAHB housing market index (10am). Fed speakers include Williams (8:30am) and Daly (8pm); Jefferson, Barkin, Powell, Mester, Bowman, Bostic and Goolsbee are slated to appear later this week

Markets Snapshot

• S&P 500 futures up 0.5% to 5,194.00
• STOXX Europe 600 up 0.3% to 506.86
• MXAP down 0.8% to 173.84
• MXAPJ down 0.8% to 530.25
• Nikkei down 0.7% to 39,232.80
• Topix down 0.2% to 2,753.20
• Hang Seng Index down 0.7% to 16,600.46
• Shanghai Composite up 1.3% to 3,057.38
• Sensex down 0.9% to 73,604.83
• Australia S&P/ASX 200 down 0.5% to 7,752.53
• Kospi down 0.4% to 2,670.43
• German 10Y yield little changed at 2.41%
• Euro up 0.1% to $1.0656
• Brent Futures down 1.0% to $89.56/bbl
• Brent Futures down 1.0% to $89.57/bbl
• Gold spot up 0.1% to $2,346.46
• US Dollar Index down 0.11% to 105.92

Top Overnight News

• Global markets calmed after Iran’s unprecedented attack on Israel. Oil slipped amid speculation the conflict will remain contained while gold pared its advance. Iran said there would be no further attacks as long as Israel didn’t respond aggressively, but Benjamin Netanyahu warned, “whoever strikes Israel, we will strike him.”
• The Senate is looking to potentially make the House TikTok ban bill the basis of its own legislation, and might attach it to FAA reauthorization, which needs to pass by May 10. WSJ
• Apple slipped premarket after iPhone shipments slid a worse-than-projected 10% in the first quarter, as sales flagged in China. The company shipped 50.1 million handsets, IDC said, its worst year-on-year drop since Covid lockdowns in 2022. BBG
• Ukraine’s top commander warned that his outmanned and outgunned army is struggling to halt a multipronged and intensifying Russian offensive, as Kyiv pleads with western partners for more air defenses and a critical military aid package remains stalled in the US Congress. FT
• ECB Governing Council member Gediminas Simkus said borrowing costs will decline this year, predicting at least three such moves. “I see a higher than 50% chance there will be more than three cuts this year,” Simkus told reporters in Vilnius. “I see a higher than zero chance that an interest rate cut may follow also in July. The July decision will be important in setting the trajectory.” BBG
• Aluminum surged by a record before erasing most of its gains on the London Metal Exchange, as traders responded to new US and UK sanctions that ban deliveries of Russian supplies produced since Friday. The restrictions — on aluminum, nickel and copper — are aimed at curbing President Vladimir Putin’s ability to fund his war machine. Announced late on Friday, they are designed to choke off Russian producers’ access to western exchanges, while still allowing metal to flow to manufacturers in allied nations that depend on them. BBG
• Tesla plans to cut more than 10% of its global workforce, Electrek reported, more than 14,000 employees if applied company wide. It said an email from Elon Musk cited “duplication of roles and job functions.” BBG
• Salesforce is in advanced talks to acquire data-management software provider Informatica according to people familiar with the matter. Informatica has a market capitalization of more than $11 billion after a 43% run-up in its shares this year as traders bet on a deal. One potential complicating factor: The price that was being discussed is below Informatica’s Friday closing stock price of $38.48 as a result of the recent jump. WSJ
• Biden cuts Trump’s lead to just 1 point in the latest NYT poll (vs. Trump’s 5 point advantage in late Feb). This is just the latest in a string of polling numbers over the last several weeks pointing to a healthy Biden bounce coming out of the State of the Union. NYT
• Treasuries are getting harder to sell as US economic data surprises to the upside, the Fed stays on hold for an extended period, and American fiscal deficits remain enormous. Wall Street doesn’t expect the Treasury to raise auction sizes of longer-term notes and bonds until next year. But the government must also contend with refinancing a chunk of its bonds. A record $8.9 trillion of Treasuries, roughly a third of outstanding U.S. debt, is set to mature just in 2024. WSJ

A more detailed look at global markets courtesy of Newsquawk

APAC stocks mostly declined as participants reflected on the geopolitical events over the weekend whereby Iran launched its first direct attack on Israel which was largely intercepted with very little damage caused, while the region also got its first opportunity to react to disappointing Chinese trade data. ASX 200 was pressured with underperformance in gold miners and tech, while sentiment was also not helped by the recent surprise contraction of imports by Australia's largest trading partner. Nikkei 225 was the worst hit and briefly dipped below 39,000 but recovered some of the losses with the help of a weaker currency. Hang Seng and Shanghai Comp. were mixed as the mainland bucked the trend after recent disappointing trade data from China added to the case for policy support measures. Participants now await tomorrow's GDP and activity data, while the PBoC provided no surprises and maintained the 1-year MLF Rate at 2.50%, as expected.

Top Asian News

• PBoC announced CNY 100bln in 1-year MLF loans with the rate kept unchanged at 2.50%, as expected
• US Assistant Secretary of State for East Asian and Pacific Affairs Kritenbrink will travel to China between April 14th-16th, according to Reuters.
• Japanese Finance Minister Suzuki reiterated that he is watching FX moves closely and wants to be fully prepared when questioned about forex moves, according to Reuters.
• Indian PM Modi said the BJP 2024 election manifesto focuses on creating jobs and boosting start-ups. Modi added the manifesto promises to bring all Indians above 70 years of age under the free health insurance programme and lift the cap on loans to INR 2mln for non-farming small and micro schemes, while it also promises to launch bullet train projects in the north, south and eastern parts of the country, according to Reuters.
• BoJ is reportedly shifting to a more discretionary approach in setting policy, with less emphasis on inflation, Reuters sources said; "Various data must be scrutinised, not just the inflation outlook," one source said.
• EU is set to launch China probe on medical device procurement, via Bloomberg; could occur as soon as mid-April and result in the EU curtailing access for China to its tenders

European bourses, Stoxx600 (+0.3%), began the session on a firmer footing and continued to edge higher throughout the morning, with participants garnering optimism from the lack of clear pointers to a potential response from Israel, following the recent attack from Iran. European sectors hold a positive tilt; Industrials top the pile, as Defensive names benefit from the heightened geopolitical environment over the weekend. Energy is found at the foot of the pile, as the crude complex sinks. US Equity Futures (ES +0.5%, NQ +0.6%, RTY +0.6%) are entirely in the green, and directionally in-fitting with the broader sentiment seen in Europe.

Top European News

• UK PM Sunak is resisting advice from allies to set the date for the UK general election, which they said would help him fend off a leadership challenge threat by Conservative Party rebels next month, according to Bloomberg.
• UK Treasury was urged by the British Property Federation industry group to reverse the decision to end stamp-duty relief for multiple dwellings and warned the move will discourage the construction of homes being built in England, according to FT.
• France launched a dispute with the UK over fishing rights after its trawlers were banned from some British waters to protect vulnerable habitats, while its diplomats will meet with UK counterparts this Monday, according to FT.
• ECB’s Villeroy said the ECB is increasingly confident that it is winning the fight against inflation which makes an interest rate cut in June very likely, according to Reuters.
• ECB's Holzmann said on Friday that a rate cut in June is likely but depends on the data and a June rate cut is probable if CPI stays on the current path, while he added the rate cut pace will depend on inflation and wages, according to ORF TV interview.
• ECB's Simkus says rate cut is possible in June and also in July; further trajectory of cuts will depend on July decisions; there is now more than a 50% chance of more than three rate cuts this year. Geopolitical shocks such as an escalation if the Israel-Iran conflict could cancel a June rate cut.

FX

• USD remains near Friday's highs as the narrative of US exceptionalism has rolled into this week. DXY is yet to make a fresh peak after climbing to a 106.10 summit on Friday.
• EUR is inching gains vs. the USD but minor compared to the damage done last week by the focus on Fed vs. ECB divergence which dragged the pair from a weekly high at 1.0885 to a low of 1.0622.
• Cable attempted to recoup some lost ground which has been prompted by a reassessment of the chronology of Fed vs. BoE rate cuts that was assumed at the start of the year. Currently trading around the upper end of today's range at 1.2490.
• JPY the clear laggard across the majors as relative Fed vs. BoJ policy paths remain the key-driving force as verbal intervention from officials remains ineffective. USD/JPY as high as 153.96 with focus on a breach of 154 and eventual 155 which many have touted as a line in the sand in Tokyo.
• AUD the best performer across the majors with price action in the metals space underpinning the currency.
• PBoC set USD/CNY mid-point at 7.0979 vs exp. 7.2478 (prev. 7.0967).
• Senior Japanese MOF official says they are in frequent and regular talks with the US and other countries' authorities on financial and FX market moves

Fixed Income

• USTs are pressured in a continuation of the late-Friday pullback as the Iran-Israel situation had yet to escalate as much as some feared at that point. USTs hold at their 108-06 trough, below which Friday's 108-00+ base resides before last week's 107-27+ low.
• Bunds have been edging lower throughout the morning, continuing price action seen on Friday; 132.00 to the downside looms, which brings the 10yr yield back towards 2.40%.
• Gilts at lows as the UK benchmark is subject to the above alongside its own divergence with the Fed. Today's base matches Friday's 97.22 trough with the figure below and then support via last week's 96.82 low thereafter.

Commodities

• Crude is softer after the widely-telegraphed Iranian attack on Israel was mostly intercepted, and Israel is yet to retaliate; Brent June slipped from a USD 91.05/bbl peak to levels under USD 90/bbl.
• Precious metals are mostly firmer; XAU and silver see modest gains and the Dollar wanes off its best level while spot palladium trades lacklustre; Spot gold hovers around USD 2,350/oz.
• Mixed trade across base metals with clear outperformance in aluminium and nickel as prices surged in APAC trade after the US banned imports of Russian-origin aluminium, copper and nickel into the US on Friday.
• US banned imports of Russian-origin aluminium, copper and nickel into the US on Friday, while it also limited their use on global metal exchanges in OTC derivatives trading. UK also announced joint action with the US to clamp down on prohibited Russian metal exports with the London Metal Exchange and the Chicago Mercantile Exchange to no longer trade new aluminium, copper and nickel produced by Russia.
• Russia's Rusal (on UK and US sanctions) says actions will have no impact on the Co.'s ability to supply, adding that overall production and quality systems are not effected
• Goldman Sachs expects no immediate supply-demand shock from the LME's ban on Russian metals.

Geopolitics: Middle East

• "Israel is considering bringing forward the operation in Rafah from the originally planned date"; "The answer Hamas gave back to the mediators is so unequivocal against a deal", according to sources cited by Israeli Radio correspondent.
• UK Foreign Minister Cameron says more sanctions against Iran will be considered.
• "Iranian Foreign Ministry: We advise the countries supporting (Israel) to warn it against taking any other action against us", via Al Jazeera.
• Israeli war cabinet is to reconvene at 12:00 BST/07:00ET, via Reuters citing a government source.
• Israel’s military said there were more than 300 projectiles fired by Iran at Israel with some of the launches from Iraq, Yemen and Iran but noted that 99% of them were intercepted and there was very little damage caused, while it said Iran undertook a very grave action that pushes the region towards escalation and Israel’s armed forces retain full functionality and are discussing options for follow-up operations, according to Reuters and CBS News.
• Israel requested an emergency meeting of the UN Security Council to condemn Iran and a senior Israeli official said there will be a significant response to the unprecedented Iranian attack, while it was also reported that Israeli Defence Minister Gallant said Israel has an opportunity to form a strategic alliance against Iran after the attack, according to Reuters.
• Israeli officials said a majority in the Israeli war cabinet favours a response to the Iranian attack but is divided over the timing and the scale, according to Reuters.
• Iranian President Raisi said the operation against Israel was carried out with high accuracy and they displayed the power of their missiles and drones well, while he added the operation targeted military centres and was carried out in full coordination between the field and diplomacy.
• Iran’s mission to the UN said Iran’s military action was in response to Israel’s aggression against Iran’s diplomatic premises in Damascus and that the matter can now be deemed concluded but warned Iran’s response will be considerably more severe should the Israeli regime make another mistake. Furthermore, it stated the conflict is between Iran and Israel, while the US must stay away.
• Iran’s Foreign Ministry said Tehran will not hesitate to take further defensive measures to safeguard its legitimate interests against any military aggressions. In relevant news, Iran’s Foreign Ministry summoned the British, French and German ambassadors, while Iran also sent a message to the US via Switzerland warning that its bases would be targeted if Washington backs Israel’s retaliation, according to Reuters.
• Iran's Revolutionary Guards commander warned if Israel retaliates, Iran’s response will be larger than seen on Saturday night and that Tehran will retaliate against any Israeli attack on its interests. The IRGC also warned any threat from the US and Israel would be met with a reciprocal response from Iran, while it was also reported that Iranian airports cancelled flights until Monday morning.
• G7 leaders condemned Iran’s attack on Israel and reaffirmed the G7's commitment to Israel’s security, while they will continue to work to stabilise the situation and avoid further escalation, as well as demanded that Iran and its proxies cease their attacks, according to Reuters.
• UN Secretary-General Guterres said the Middle East is on the brink and people in the region are facing a real danger of devastating full-scale conflict, while he said now is the time to defuse, de-escalate and for maximum restraint, according to Reuters.
• US President Biden said he condemns these attacks in the strongest possible terms and spoke with Israeli PM Netanyahu to reaffirm America’s ironclad commitment to the security of Israel, according to Reuters. It was also reported that President Biden told Israeli PM Netanyahu the US would oppose any Israeli counterattack against Iran, according to a White House senior official cited by Axios.
• US senior administration official said the US had contact with Iran through Swiss intermediaries ahead of the attack on Israel and sent the US a message after the attack, but noted that Iran did not give a 72-hour warning and its intent was to be highly destructive. Furthermore, the US official said Israel has made it clear it is not looking for a significant escalation with Iran and that G7 leaders discussed sanctions against Iran and designating the IRGC as a terrorist organisation, according to Reuters.
• US Pentagon said forces in the Middle East intercepted dozens of missiles and drones launched from Iran, Iraq, Syria and Yemen. US Defense Secretary Austin called on Iran to de-escalate the situation and the US also called on Iran to immediately halt any further attacks. Furthermore, he said the US does not seek war or conflict with Iran but will not hesitate to protect its forces and support the defence of Israel, while Western intelligence sources stated that most of the Iranian drones and missiles that flew were downed by Israeli and US aerial interceptions, according to Reuters.
• US Deputy Representative to the UN Robert Wood said the UN Security Council has an obligation to not let Iran’s actions go unanswered and the US will explore additional measures to hold Iran accountable at the UN in the coming days, while he added Iran will be held responsible if it or its proxies takes action against the US or further action against Israel, according to Reuters.
• US House is to consider legislation to support Israel next week, according to Republican majority leader Scalise cited by Reuters.
• Jordan said it intercepted flying objects that entered its airspace on Saturday night to ensure the safety of its citizens. It was also reported that Jordanian PM Khasawneh said an escalation in the region would lead to dangerous paths and stressed the need to reduce escalation, while he said the Jordanian army is ready to confront with all of its means any attempt from any party that endangers its security, according to Reuters. It was also reported that Tehran is closely watching Jordan which could become the next target in case of any pro-Israel move, according to a source cited by Fars News Agency.
• Turkish diplomatic source said Iran informed Turkey in advance of its planned military operation against Israel and Iran told the US via Turkey that its operation would only respond to the embassy attack and not go further, while the US conveyed to Iran that its operation must be within certain limits, according to Reuters.
• Israeli PM Netanyahu’s office said Hamas rejected the hostage deal tabled by mediators and that Israel will continue to try to achieve the objectives of the war with Hamas with full force. It was also reported that the Israeli military said it will be calling up two reserve divisions for operations in Gaza over the next few days, according to Reuters.
• UK said it has been working with partners across the region to de-escalation in response to increased Iranian threats and escalation in the Middle East, while it has moved several additional air force jets and refuelling tankers to the region with UK jets to intercept any airborne attacks within range of their existing missions as required, according to Reuters.
• Iran’s state news agency reported that IRGC navy special forces seized a vessel linked to Israel and that the MSC Aries vessel was transferred to Iran’s territorial waters, according to Reuters.

Geopolitics: Other

• China’s Coast Guard blocked Philippines vessels in an operation on Saturday which occurred just 35 nautical miles from the Philippines’ coastline amid increasing maritime tensions, according to FT.

US Event Calendar

• 08:30: March Retail Sales Advance MoM, est. 0.4%, prior 0.6%
  • March Retail Sales Control Group, est. 0.4%, prior 0%
  • March Retail Sales Ex Auto MoM, est. 0.5%, prior 0.3%
• 08:30: April Empire Manufacturing, est. -5.0, prior -20.9
• 10:00: Feb. Business Inventories, est. 0.4%, prior 0%
• 10:00: April NAHB Housing Market Index, est. 51, prior 51

DB's Jim Reid concludes the overnight wrap

Since last Friday, geopolitics has returned as the biggest concern for markets, as investors react to Iran’s attack on Israel over the weekend. But since markets have reopened after the weekend, the reaction among key assets has been subdued, with investors hopeful that any escalation will prove contained. For instance, Brent crude oil prices have come down by -0.24% this morning to $90.23/bbl, and futures on the S&P 500 are actually up by +0.30%. So that’s a decent turnaround from Friday, when fears about an escalation meant the S&P 500 posted its worst daily performance since January. US Treasuries have also unwound some of their Friday moves, and the 10yr yield is up +3.7bps to 4.56%.

To recap the weekend’s developments, Iran launched a major drone and missile attack on Israel on Saturday evening, which marked the first time that there’d been a direct attack on Israel from Iran . Israel said that over 300 drones and missiles had been fired, although the vast majority of these were intercepted. In a statement, US President Biden described it as “an unprecedented air attack”, but the White House has sought to avoid an escalation. For instance, John Kirby, the White House National Security Communications Adviser, said that “The President has been clear. We don’t want to see this escalate”.

Looking forward, the important question now is how Israel might respond to this, and whether it could lead to a further escalation in the conflict. It was reported by CNN that a meeting of Israel’s war cabinet ended on Sunday evening without a decision on how Israel would respond, according to an Israeli official. And Reuters reported that the war cabinet favoured retaliation, but was divided over the response according to Israeli officials. That followed comments earlier in the day from Benny Gantz, a minister in the war cabinet, who said that Israel will “exact a price from Iran in a way and time that suits us”. And Itamar Ben-Gvir, the national security minister, called for a “crushing attack”. But in the US, reports have indicated that there is more caution about an escalation, and Axios reported that Biden had told Israeli PM Netanyahu that the US wouldn’t support an Israeli counterattack, according to a senior White House official. For more on the risks and next steps to watch, see our EM research colleagues’ reaction note published overnight here.

This uncertain backdrop means that markets haven’t sold off further this morning relative to Friday. It’s true that most Asian equity indices are lower, but that partly reflects a catchup to the selloff that already took place on Friday after they’d closed, when headlines came through suggesting that an attack could happen. That backdrop has seen the Nikkei (-1.05%), the Hang Seng (-0.73%) and the KOSPI (-0.59%) all lose ground, whilst the Japanese Yen is also trading at its weakest level against the US Dollar since 1990, at 153.83. However, there have been gains for the CSI 300 (+1.90%) and the Shanghai Comp (+1.21%).

That selloff on Friday occurred after reports came through that Israel was preparing for a direct attack as early as Saturday. In response, there was immediately a surge in oil prices, which moved above $92/bbl at one point intraday, before paring back those gains. Alongside that, the S&P 500 (-1.46%) experienced its worst daily performance since January, and the VIX index of volatility closed at 17.31pts, marking its highest level since October. In turn, investors moved into haven assets, and the dollar index closed at its highest level since early November, having experienced its biggest weekly gain since September 2022.

Given all this, developments in the Middle East will be the main focus this week, and we know from recent experience that geopolitical tensions can impact the global economy through several channels. Most directly, the effects of higher oil prices will be felt globally, and this is coming at a time when there’s already concern about sticky inflation in several countries. That’s something that could create a dilemma for central banks, as we also found out after Russia’s invasion of Ukraine in 2022. On the one hand, there is the risk that a geopolitical shock hurts growth, bringing forward the timing of rate cuts. Indeed, markets were clearly pricing that risk on Friday, with the chance of a Fed rate cut by June moving up from 24% to 30%, although that’s since moved back to 24% this morning. But then again, if higher oil prices lead to more inflation and there are second round effects on other prices, then that could mean monetary policy has to stay in restrictive territory for longer. So the potential effects can work both ways.

We’ll get the chance to hear from several policymakers this week, as numerous officials are gathering in Washington DC for the IMF-World Bank Spring Meetings. Tomorrow, we’ll get the IMF’s latest World Economic Outlook, including their forecasts for the global economy. And over the week, we’ll hear from Fed Chair Powell, ECB President Lagarde, and Bank of England Governor Bailey, among others. This week is also the last opportunity to hear from Fed speakers ahead of the next meeting, as their blackout period begins on Saturday.

Otherwise this week, earnings season will begin to ramp up before it really gets into full flow over the subsequent week. That includes releases from 41 companies in the S&P 500, along with 21 from the STOXX 600, with results from Morgan Stanley, Goldman Sachs, Bank of America, Netflix and Johnson & Johnson.

Finally on this week’s data, we’ve got the Q1 GDP release for China out tomorrow, along with their March data for retail sales and industrial production. Meanwhile, there are CPI releases for March in the UK, Japan and Canada, which will also be in focus as markets assess the timing of any monetary policy moves. Then in the US, we’ve also got some more data for March, including retail sales, housing starts, building permits, and industrial production.

To recap last week more fully now, it was a very weak one for markets overall, as the combination of geopolitical fears and an upside surprise in the US CPI meant that bonds and equities both lost ground again. By the end of the week, the S&P 500 was down -1.56%, marking its biggest weekly loss since October, and the small-cap Russell 2000 (-2.92%) was back in negative territory for the year. There was a better performance for the Magnificent 7 (+0.99%), which helped to dampen the S&P 500’s overall losses. But it meant that the equal-weighted S&P 500 (-2.67%) was down by even more, with the index experiencing its worst week since September. Otherwise, the S&P 500 banks index (-4.73%) struggled amidst the start of earnings season, whilst Europe’s STOXX 600 was only down -0.26%.

Over in fixed income, US 2yr and 10yr yields both saw their highest weekly close since November, up +14.7bps to 4.90% and +11.9 bps to 4.52% respectively. That was mainly because of Wednesday’s US CPI print, which added to fears that inflation was proving persistent, and led to a significant reassessment about the timing of rate cuts. By the end of the week, Fed funds futures were only pricing 46.5bps of cuts by December (-18.3bps last week but +4.6bps on Friday). And investors lowered the chance of a rate cut by the June meeting from 54% to 30%. That said, it was a different story in Europe, where the 10yr German bund saw yields fall -4.0bps on the week (-10.4bps Friday). That came as the ECB added to the signals that they were thinking about a rate cut as soon as the next meeting in June.

Whilst bonds and equities lost ground for the most part, several haven assets had a stronger performance. For instance, the dollar index (+1.67%) had its best week since September 2022, which was the same week as the UK’s mini-budget under former PM Liz Truss. In the meantime, gold prices (+0.63%) were up for a 4th consecutive week, which is the first time that’s happened since January 2023.

Finally, sentiment wasn’t helped on Friday by the University of Michigan’s preliminary consumer sentiment index for April. That fell to 77.9 (vs 79.0 expected), whilst inflation expectations also moved higher. 1yr inflation expectations were up two tenths to 3.1% (vs 2.9% expected), whilst 5-10yr expectations also rose to 3.0% (vs 2.8% expected).