Israel strikes back against Iran, triggering safe haven flows which unwound

EU mid-market update: Israel strikes back against Iran, triggering safe haven flows which unwound as reports noted damage was limited and retaliatory strikes could now be over

Notes/observations

- Assets whipsaw as Israel retaliates with strikes against Iran, reportedly targeting nuclear research facilities with drones/UAVs. Risk off moves reversed as confirmation of no major damage or loss of life was reported. Oil prices spiked higher but pared back as session wore on. Senior Iranian officials and global analysts downplaying severity in attempt to calm the mood. Markets await ‘the next move’, but US press say direct state-to-state strikes now over.

- On economic data, UK retail sales was weaker than expected, noting a rise in motor fuel and non-food goods, counteracted by a drop in department store, food and online spending.

- Bitcoin halving is expected in the next 24 hours. Bitcoin is volatile due to Middle East geopolitical tensions and upcoming event.

- Fairly quiet on corporate side, as next week sees substantial pick up in EU and US earnings volumes.

- US expected premarket earnings: AXP, FITB, PG, RF.

- Asia closed lower with Nikkei225 underperforming -2.5%. EU indices are -0.5% to -1.1%. US futures are -0.4% to -0.8%. Gold +0.3%, DXY -0.1%; Commodity: Brent +0.3%, WTI +0.5%; Crypto: BTC +5.5%, ETH +4.2%.

Asia

- Japan Mar National CPI Y/Y: 2.7% v 2.8%e; CPI Ex-Fresh Food (core) Y/Y: 2.6% v 2.7%e.

- BOJ Gov Ueda stated that there was a chance that the weak Yen currency might affect trend inflation and if so it could lead to a policy change.

Global conflict/tensions

- Israel struck back at Iran with targets hit in Western part of country, oil price surges. Reports did circulate that Israel told the US on Thursday that it planned Iran response in 24-48 hours. (**Reminder: Iran Senior Commander Haghtalab stated that could review our nuclear doctrine; If Israel dared to hit out nuclear sites and would surely hit back.

- Israel strike in Iran were said to be limited in scope and not carried out by manned aircraft.

- Iran stated that all military and nuclear sites at Isfahan were safe; air defenses were activated against 3 UAVs in Isfahan.

- IAEA also confirmed there was no damage to Iran's nuclear sites.

- Early assessment was that Iran would not be retaliating for Israel's strike at this time.

Europe

- ECB's Panetta (Italy, dove) noted that disinflation was advanced and continuing; ECB would consider how to modulate restrictions.

- ECB’s Rehn (Finland) noted that inflation was converging toward the ECB's 2% target. No longer see the need to keep rates at the current levels for a long duration.

- ECB's Holzmann (Austria) stated that must remain cautious about potential first cut; There would likely be a rate cut in June.

- ECB’s Vujcic (Croatia) noted that thus far the FX market had been very calm about the risk of ECB/Fed rate path divergence.

- S&P cut Israel long-term sovereign ratings to A+ from AA-; Outlook negative.

Americas

- Fed’s Bostic (hawk, voter): Inflation was still too high, still had a way to go to get to 2%; economy was slowing down, but slowing down slowly; Reiterated sees one rate cut this year.

- Fed's Kashkari (non-voter): Could potentially wait until 2025 to cut rates; Need to be patient until we are convinced that inflation is falli.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 -0.54% at 496.92, FTSE -0.73% at 7,819.59, DAX -1.05% at 17,663.25, CAC-40 -0.81% at 7,958.02, IBEX-35 -1.24% at 10,631.96, FTSE MIB -1.06% at 33,521.00, SMI -0.57% at 11,166.60, S&P 500 Futures -0.48%].

Market focal points/key themes: European indices open lower across the board and stayed in the red through the early part of the session; geopolitics seen sapping risk appetite; better performing sectors include consumer discretionary and telecom; among sectors trending to the downside are industrials and materials; tech sector under pressure following disappointing results from TSMC; oil & gas subsector supported after Brent spiked over $90/bbl but later retraced in the early hours; consumer staples sector supported after L’Oreal saw strong sales growth; Schneider Electric confirms in strategic discussions with Bentley Systems; Vinci completes previously announced acquisition of parkway in Colorado; earnings expected in the upcoming US session include Procter & Gamble, American Express, SLB and Fifth Third Bancorp.

Equities

- Consumer discretionary: L'Oreal [OR.FR] +5.0% (Q1 results, beats estimates; comments on China business), Sodexo [SW.FR] +4.5% (H1 results, raises FY24 guidance), Royal Unibrew [RBREW.UK] +15.0% (earnings).

- Energy: Shell [SHEL.UK] -0.5% (oil markets digest Israel strikes in Iran).

- Financials: 888 Holdings [888.UK] +2.0% (Q1 trading update) - Healthcare: EssilorLuxottica [EL.FR] -1.5% (earnings) - Industrials: Schneider Electric [SU.FR] -2.5% (confirms talks with Bentley Systems on potential deal), Comet Group [COTN.CH] -5.0% (Q1 results, affirmed guidance).

Speakers

- ECB's Kazaks (Latvia, non-voter, hawk) stated that was too early to declare victory in inflation fight.

- ECB's Scicluna (Malta) commented that it might need 50bps cuts if inflation set to miss 2.0% target. Stressed that policy would become more restrictive as inflation slowed. Region faced a double blow if both ECB and Fed don't lower rates.

- German Govt said to raise its 2024 GDP growth forecast from 0.2% to 0.3%.

- Senior Iranian official stated that it had no plan for immediate retaliation after Israel launched air strike against Iran.

Currencies/fixed income

- Safe haven flows the initial predominate theme during the Far East session on reports Israel struck back at Iran with retaliatory move on target in western part of country. Price action saw oil price spike, global bonds yield decline and USD holding onto its firm tone. Gold spiked above $2,410 following the reports but returned to the $2,380 area into the European morning.

- Risk aversion was tempered after a senior Iranian official stated that its military and nuclear sites at Isfahan were safe. Iran also hinted it had no plan for immediate retaliation after Israel launched air strike against Iran.

- EUR/USD recovered to 1.0650 by mid-session after probing the 1.0600 area in Asia. ECB members continued to expect Jun to begin its rate cut cycle but remains concerned over possible price shocks and geopolitical conflicts.

- USD/JPY at 154.45. Dealers noted that BOJ Ueda comment that it could raise interest rates again if the Yen currency decline considerably increase inflation. The 155 level remains key resistance and dealers well aware of commentary prior Japanese officials rhetoric of ‘closely watching’ the FX moves. Numerous Far East officials have commented on the weakness in their respective currencies in recent sessions against the greenback (South Korea, Philippines, Indonesia and Thailand).

Economic data

- (UK) Mar Retail Sales (ex-auto/fuel) M/M: -0.3% v +0.3%e; Y/Y: 0.4% v 1.0%e.

- (UK) Mar Retail Sales (including Auto/Fuel) M/M: 0.0% v 0.3%e; Y/Y: 0.8% v 1.0%e.

- (DE) Germany Mar PPI M/M:0.2 % v 0.1%e; Y/Y: -2.9% v -3.3%e.

- (TR) Turkey Central Bank (TCMB) Apr Inflation Expectations Survey: Next 12-months: 35.2% v 36.7% prior.

- (TH) Thailand Apr Foreign Reserves w/e Apr 12th: $222.1B v $223.7B prior.

- (CN) Weekly Shanghai copper inventories (SHFE): 300.0K v 290.2K tons prior.

- (ES) Spain Feb Trade Balance: -€2.4B v -€3.7B prior.

- (RU) Russia Narrow Money Supply w/e Apr 12th (RUB): 18.21T v 18.12T prior.

Fixed income issuance

- (IN) India sold total INR240B vs. INR240B indicated in 2028 and 2064 bonds.

Looking ahead

- 05:25 (EU) Daily ECB Liquidity Stats.

- 05:30 (ZA) South Africa to sell combined ZAR1.0B in I/L 2033, 2046 and 2058 Bonds.

- 06:00 (UK) DMO to sell £6.0B in 1-month, 3-month and 6-month bills (£1.0B, £2.0B and £3.0B respectively).

- 07:30 (IS) Iceland to sell new 2027 RIKB Bonds.

- 07:30 (IN) India announces upcoming bill issuance (held on Wed).

- 07:30 (IN) India Forex Reserve w/e Apr 12th: No est v $648.6B prior.

- 08:00 (MX) Mexico Feb Retail Sales M/M: 0.0%e v -0.6% prior; Y/Y: +1.8%e v -0.8% prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:30 (CL) Chile Central Bank Traders Survey.

- 10:15 (UK) BOE’s Ramsden.

- 10:30 (US) Fed’s Goolsbee.

- 11:00 (CO) Colombia Feb Trade Balance: -$0.7Be v -$1.0B prior; Total Imports: $4.7Be v $5.0B prior.

- 12:00 (EU) Potential sovereign ratings after European close ( S&P on UK/ Netherlands/; Italy and Greece).

- 12:30 (UK) BOE’s Mann.

- 13:00 (US) Weekly Baker Hughes Rig Count.

- 15:00 (DE) ECB’s Nagel (Germany).