Markets are thrown in risk-off modus on headlines of an Israeli attack on Iran

Markets

After a brief correction Wednesday, core yields again turned north yesterday. US yields added between 6.2 bps (5-y) and 3 bps (30-y). The Philly Fed business outlook printed much strong than expected (15.5 from 3.2).Weekly jobless claims (212k) confirmed the narrative of a resilient US labour market. Fed governors turn ever more guarded on any possible rate hikes this year. Fed’s Bostic favours a scenario of 1 cut at the end of this year. Fed’s Kashkari repeated the Fed needs more confidence that inflation is declining further. It is possible to delay a rate cut to 2025. Bunds gained slightly less, between 2.8 bps (30-y) and 3.8 bps (2-y) as ECB officials try to find how much autonomous rate cuts are possible if the Fed stays on hold for longer. Equites traded mixed (EuroStoxx 50 +0.46%, Nasdaq minus 0.52%). Even so, EMU and US indices remain in a sell-on-upticks dynamics with first relevant support levels coming closer. Higher (US) yields also helped the dollar to reverse early softness. EUR/USD closed at 1.0643 (from 1.0673). USD/JPY tested multi-year peak levels in the 154.70/80 area. DXY regained the 106 barrier. 

Markets this morning are thrown in risk-off modus on headlines of an Israeli attack on Iran. In a first reaction, Asian equities spiked lower, but currently are unwinding part of the initial losses. Safe haven flows propelled US Treasuries with yields briefly declining more the 10 bps, but a reversal currently limits the decline between 4.5 (2-y) and 6.5 (10- y) bps. EUR/USD briefly dropped to the 1.061 area, but the 1.06 support remains intact for now (currently 1.063). The yen briefly strengthened below USD/JPY 154, but also this move could not be sustained (154.3). Brent oil jumped from $87 p/b to temporary trade above $90 p/b, but also eases back to $88.75. Later today, the developments in the Middle East probably will continue to dominate the market dynamics as there are no important data on the agenda. The market reaction on Friday last week suggested that a reaction to attacks between Iran and Israel could stay modest as long markets don’t anticipate a large scale escalation. We assume any setback in yields to stay limited. Higher oil or commodity prices even might further raise the inflation expectations component/risk premium for yields a longer maturities. The dollar maintains a positive momentum. A break of EUR/USD below 1.06 would suggest further losses/USD gains. This morning, UK March retail sales printed slightly softer than expected (headline 0.0% M/M and 0.8% Y/Y). EUR/GBP gains a few ticks post the release (0.8565).

News and views

Japanese inflation eased in March. Headline prices rose 2.7%, down from 2.8% in February. The BoJ’s preferred gauge excluding fresh food came in at 2.6% vs 2.8% the month before while a measure ignoring energy prices as well eased from 3.2% to 2.9% - the first sub 3% reading since November 2022. While all gauges fell short of expectations (0.1 ppt), they remain above the 2% BoJ target for two years running. Services price growth slowed to 2.1% but should stay supported going forward on the biggest wage negotiation (>5%) outcome in decades. Coupled with the country’s weak(ening) currency – the Japanese yen recently hit a new 34-y low against the dollar – and the government’s decision to phase out utility subsidies from May (creating base effects), inflation could easily go up again in coming months. Today’s numbers aren’t going to change the BoJ’s widely expected status quo at the April 26 meeting. But upward revisions to the inflation forecast (+2% at the end of the policy horizon?!) may lay the groundwork for another rate hike later this year. The yen completely ignored the CPI outcome with geopolitical events dominating trading this morning. USD/JPY dropped to an intraday low of 153.59 after Israel retaliated for an Iranian strike last weekend in a tit-for-that response that risks escalating. The pair quickly pared losses to 154.31.

Yesterday’s European summit revealed sharp opposition against a France-led push for reforms to deepen financial market integration and central supervision. The project at stake, Capital Markets Union, mostly puts larger economies including Germany, Italy, Spain and the Netherlands against smaller countries that are wary to cede national oversight and regulatory powers to Brussels. The idea to create a CMU was already floated a decade ago but stranded quickly. Major challenges including the green transition and defense spending renewed momentum (for some at least) for an overhaul, believing that it would help tap private capital to fund the investments.

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