While US futures are still modestly in the red, they are not only well off the worst overnight levels, but they are almost unchanged since yesterday's close following a performative Israeli retaliation. which followed a performative Iranian attack, which appears to be the end of the story. For those who missed it, early on Friday local time, explosions echoed over an Iranian city on Friday in what sources described as an Israeli attack, but Tehran played down the incident and indicated it had no plans for retaliation - a response that appeared gauged towards averting region-wide war. The limited scale of the attack and Iran's muted response both appeared to signal a successful effort by diplomats who have been working round the clock to avert all-out war since an Iranian drone and missile attack on Israel last Saturday. And so, after a whole lot of nothing overnight, as of 730am, S&P futures are practically unchanged at 5,045, Brent is actually lower compared to Thursday's close after briefly rising above $90 earlier, gold is unchanged, bonds are modestly firmer though have pared the majority of the overnight advances, and bitcoin is higher after aggressively dumping late on Thursday. There is nothing of significance on today's calendar.

Premarket, megacap tech are mostly lower: TSLA -1.8%, NVDA -1.1%, AMZN -95bp, META -91bp. NFLX tumbled fall 6.6% after the streaming-video company reported its first-quarter earnings. While the results were better than expected, with customer additions especially strong, its second-quarter revenue forecast was a slight disappointment. Here are some other notable premarket movers:

The latest fake escalation cap a dismal week for markets after solid economic readings and hawkish Fedspeak that have overturned Powell's December pivot and have forced investors to revise the timing of a keenly anticipated pivot to easier policy and the scale of potential rate cuts.

“With inflation sticky, central banks don’t have the option to look through spikes in oil prices, should they happen,” said Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management. “They will have to revert to higher for longer rates which at this stage will be a shock to all markets.”

The latest the spook the market was NY Fed President John Williams who said while it isn’t his baseline expectation, even a rate hike is possible if warranted. His Atlanta counterpart Raphael Bostic said he doesn’t think it will be appropriate to ease until toward the end of 2024. The Fed may hold rates steady all year, Minneapolis Fed chief Neel Kashkari told Fox News Channel.

Meanwhile, on the geopolitical front, an Iranian military official signaled Tehran doesn’t feel compelled to react to the blasts which US officials say were caused by Israeli strikes, with semi-official Mehr agency quoting Army Commander-in-Chief Abdolrahim Mousavi saying Tehran has already reacted to Israeli threats. Despite Friday’s moves to allay fears of a wider war in the Mideast, the events are unsettling and will keep investors from taking bold bets, according to Michael Brown, strategist at Pepperstone Group Ltd. in London.

“No one will want to be short of crude and the havens ahead of the weekend,” he said. “From a risk-management perspective you can’t say definitively that geopolitical risk is done and dusted. So we may see another bout of de-risking. Ultimately it’s a case of people being reluctant to take on too much exposure.”

Europe's Stoxx 600 is down 0.4%, but it too reversed most of the overnight losses.  The food, beverage and tobacco sub-index leads gains whlie retail stocks decline the most. In company news, L’Oreal surged after better-than-expected quarterly sales. Here are the most notable European movers:

In FX, the Bloomberg Dollar Spot Index is little changed while the Swiss franc remains the best performer among the G-10’s, rising 0.4% versus the greenback. The pound gains 0.1% with little reaction shown to weaker-than-expected UK retail sales data.

In rates, treasuries remain richer across the curve after paring the Asia-session advance sparked by reports Israel launched retaliatory strike on Iran. Yields lower by 4bp to 6bp as US trading gets under way, back toward middle of day’s range.  US 10-year yields around 4.58% after briefly dropping below 4.50% during Asia session; inverted 2s10s spread remains near lows of the day as intermediates outperform, flatter by around 2bp.  Fed rate-cut expectations edged higher, with OIS pricing in 41bp of easing by year-end vs 38bp at Thursday’s close. Treasury coupon auctions next week — final ones of the February-to-April financing quarter — include 2-, 5- and 7-year notes Tuesday to Thursday.

In commodities, WTI crude oil futures are down ~1% near $82/bbl after erasing a more than 4% surge above $86/bbl as media in both countries appeared to downplay the severity of the incident. Gold is unchanged around $2377.

Bitcoin rises 2% ahead of the halving event expected later Friday.

US economic data slate empty for the session; Fed speakers include Goolsbee at 10:30am, and Fed releases Financial Stability Report at 4pm.

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APAC stocks were lower across the board as the initial tech-related selling stemming from Wall St was exacerbated by reports of explosions in Iran following an Israeli operation although stocks are off today's worst levels as Iran downplayed and later denied the attack. ASX 200 was pressured with losses led by underperformance in tech and amid the bout of geopolitical-related turmoil. Nikkei 225 suffered intraday losses of around 3% and briefly dipped beneath the 37,000 level.
Hang Seng and Shanghai Comp. were lower but with losses only mild compared to the regional counterparts

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European bourses, Stoxx600 (-0.6%) are entirely in the red, with sentiment hit after Israel conducted an operation against Iran on a military airbase near Isfahan; though Iran later downplayed the attack, which helped to lift sentiment off worst levels, with contracts continuing to pare losses in otherwise quiet newsflow. European sectors hold a strong negative tilt; Industrials is found at the foot of the pile, with Schneider Electric (-1.9%) leading the losses. Autos are also lagging, after Nissan downgraded its guidance citing lower sales volume. US Equity Futures (ES -0.6%, NQ -0.8%, RTY 0.7%) are entirely in the red, though very much off worst levels seen overnight, sparked by the Israeli attacks on Iran. As for stock specifics, Netflix (-6.1%) is lower in the pre-market despite reporting strong headline metrics; however, the Co’s Q2 guidance fell short of expectations.

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Geopolitics: Middle East

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US Event Calendar

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DB's Jim Reid concludes the overnight wrap

Markets are reacting to new developments in the Middle East overnight, as US officials have said that Israel had launched a missile strike against Iran . The news has raised fears that the conflict will escalate further, particularly since Iran had said they would respond to any attack, with the Iranian foreign minister having said they would “give a decisive and proper response” to any further military moves. The full details are still coming through, but Iran’s official news agency IRNA reported that they had activated air defence systems, and that flights in Tehran, Isfahan and Shiraz had been suspended. And the New York Times reported three Iranian officials had said a strike hit a military air base near Isfahan early this morning.

In response, Brent crude oil prices (+2.04%) have spiked up to $88.89/bbl, although they have come down from their peak of $90.75/bbl immediately after the news came through. More broadly, the effects have been clear across global markets, and futures on the S&P 500 are down -0.85% this morning, which would put the index on track for a 6th consecutive decline for the first time since October 2022. In the meantime, investors have moved into safe havens, and the 10yr Treasury yield is down -8.0bps this morning to 4.55%, whilst gold prices are up +0.15%. Asian equities have also seen a decisive move lower overnight, including the Nikkei (-2.37%), the KOSPI (-1.63%), the Hang Seng (-1.23%), the CSI 300 (-0.88%) and the Shanghai Comp (-0.40%).

Before all that, markets followed a familiar pattern yesterday, with an initial stabilisation giving away to further losses once again. That meant the S&P 500 (-0.22%) lost ground for a 5th consecutive session, which hasn’t happened since last October, and the NASDAQ (-0.52%) fell to its lowest level in almost two months. Moreover, the latest declines mean that the S&P 500 is on track to post a third consecutive weekly decline for the first time since September, and the NASDAQ is on track for a fourth consecutive weekly decline for the first time since December 2022. So this marks a big shift from the rapid rally we saw from November up to the end of March, and it now leaves the S&P 500 down -4.63% from its recent peak, even before any moves today that futures are currently indicating.

The selloff wasn’t confined to equities, and before the geopolitical developments overnight, sovereign bonds also fell thanks to strong US data, which led investors to become increasingly sceptical the Fed would cut rates this year. For instance, the weekly initial jobless claims were at 212k (vs. 215k expected) over the week ending April 13, offering further evidence that the labour market was still resilient. Moreover, the Philadelphia Fed’s business outlook moved up to 15.5 in April (vs. 2.0 expected), which is the strongest reading in two years.

That scepticism about rate cuts got added support by comments from New York Fed President Williams, who said “I definitely don’t feel urgency to cut interest rates.” In response to a question, he commented that another rate hike wasn’t his baseline but that “if the data are telling us that we would need higher interest rates to achieve our goals, then we would obviously want to do that”. Meanwhile, Atlanta Fed President Bostic said that “I’m comfortable being patient”, reiterating his view that the Fed “won’t be in a position to reduce our rates until toward the end of the year”. In fact by the close, the amount of cuts priced in by the December meeting fell to 39bps, which is the fewest so far this year, although that’s since risen overnight to 43bps. And in turn, that led to a decent selloff for US Treasuries, with the 10yr yield (+4.6bps) back up to 4.63%, whilst the 2yr yield (+5.4bps) ended the day at 4.99%.

Over at the ECB however, several speakers continued to sound increasingly confident about a June cut. For instance, Finnish central bank governor Rehn said “Provided that we are confident that inflation will continue converging to our 2% target in a sustained way, the time will be ripe in June to start easing the monetary policy stance and to cut rates”. Austria’s Holzmann, one of the most hawkish ECB members, said that “If inflation develops as expected and, above all, the geopolitical problems don’t worsen, there will likely be a majority for an interest rate cut in June”. We also got some hints on what the ECB approach might look like beyond June. Lithuania’s Simkus considered about three rates cut this year as a baseline, while Latvia’s Kazaks saw “no rush in kind of further pace of rate cuts”. By contrast, France’s Villeroy suggested that consecutive rate cuts may be in play, noting that “When we say meeting by meeting, it can be at each following meeting — I don’t think, for example, that we should concentrate our rate cuts at quarterly meetings when we have a new forecast.” All this meant European sovereign bonds saw a smaller rise in yields than US Treasuries, with those on 10yr bunds (+3.1bps), OATs (+2.5bps) and BTPs (+1.4bps) all moving higher.

That backdrop meant that equities had another tough session. Initially they had looked to post a better performance, and the S&P 500 had been up by +0.69% intraday. But that began to reverse around the European close, leaving the index down -0.22%, in its 5th consecutive decline. Tech stocks led the underperformance again, and the Magnificent 7 (-0.49%) lost further ground, led by a -3.55% decline for Tesla . That said, banks (+0.99%) and communication services (+0.66%) outperformed, and over in Europe, which closed earlier in the day, the STOXX 600 advanced +0.24%.

In terms of yesterday’s other data, US existing home sales fell to an annualised rate of 4.19m in March (vs. 4.20m expected). Otherwise, the Conference Board’s Leading Index was down -0.3% in March (vs. -0.1% expected), which took the index down to its lowest level since May 2020. Overnight, we’ve also got the news that Japanese inflation fell to +2.7% in March (vs. +2.8% expected).

To the day ahead now, and central bank speakers include BoE Deputy Governor Ramsden, the BoE’s Mann, the Fed’s Goolsbee, and the ECB’s Nagel. Otherwise, data releases include UK retail sales and German PPI for March.