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:
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:
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.
“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
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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.
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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.
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Geopolitics: Middle East
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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).