After the airstrikes on Iran over the weekend traders pulled out the typical conflict playbook with equities moving lower, oil prices and precious metals rallying, and a flight to the USD. However, there was no haven bid for treasuries as yields- which moved steadily lower last month- ripped higher. Inflationary pressure from oil as well as price details in the ISM Manufacturing report yesterday contributed to action. This catalyst didn’t come out of left field and markets were reasonably well hedged. By the US open futures had come off the overnight lows and the S&P 500 held above the recent lows (~6,780) after the open quickly reclaiming the 100d ma. Traders were quick to monetize hedges as markets have largely shrugged off geopolitical events recently and after the initial narrative was that the shock and awe campaign would lead to a fast conclusion. That being said there were some signs of de-risking happening beneath the surface with pressure in some of the crowded long and popular short positions rallying.

Iran has been retaliating, including firing on ships in the Strait of Hormuz and attacking energy and infrastructure targets across the Middle East raising concerns that this could drag on longer than initially thought. This led to some more aggressive de-risking overnight with weakness in both Asian and European markets. “War-flation” was persistent again overnight as oil traded above Sunday’s high and natural gas prices in Europe continued to surge along which along with a hotter EU CPI print continued to push global yields higher, bringing back memories of 2022. It was also notable that gold and other precious metals (crowded longs) were moving significantly lower.

US futures were down ~2% ahead of the open with the S&P cash index gapping just below the recent support level we mentioned above. After the open the index extended to the downside trading down ~2.5% at the lows, retesting the December low, before bouncing back to opening levels as Treasury yields had moved about 10bps off the overnight highs. Equities have since taken another leg higher amidst reports that the administration is considering providing military support to tankers moving through the Strait of Hormuz and potentially helping to backstop insurance which was just confirmed by a Truth Social post. As we head to print, the S&P 500 is down 52pts to 6,830 (-0.8%), the Dow is down 277pts to 48,628 (-0.6%), while the Russell 2k is down 35pts to 2,621 (-1.3%). For the foreseeable future geopolitical headlines are going to drive the volatility. Today there was no major US economic data but that will change in the coming days with ADP Employment/ISM services tomorrow and the BLS Employment Report/Retail sales on Friday.