Employment collapses from AI were a concern last week and rotational flows have been a main story for the market so far this year. Heading into this week, markets were also positioning for the US military build-up in the Middle East, alongside escalating warnings from the administration. There was some mixed reporting coming out of the negotiations with Iran last week but over the weekend diplomatic efforts were called off as operation Epic Fury was launched. Before we go any further, our thoughts and prayers are with all the service men and women and their families.

The initial reaction was to implement the typical conflict playbook. Equities were under pressure, oil rallied, precious metals moved higher and the USD had a strong safe haven bid. However, a corresponding haven bid for Treasuries didn’t emerge, with rising concerns of “war-flation” driven by the impact of higher energy costs and the potential closure of the Strait of Hormuz pushing yields higher. The length of the conflict, impact on energy prices and the ability to transit the Strait of Hormuz are what markets are keying on right now.

The S&P 500 ended the week down 2%. The index managed to rally off significant declines and bounce off support at the 100d moving average throughout the week. However, that resilience cracked on Friday. The >1% decline pushed the index firmly into the red and the 100d failed to hold, gapping below it at the Open and never mounting a challenge to regain it. That also takes us to just above the December low ~6,720, with the rising 200d about 250 points below.

Crude had been moving steadily higher since the beginning fo the year. That action exploded this week as Brent flew ~30%, to over $90/barrel for the first time since April 2024. European Nat Gas (TTF) meanwhile screamed higher. There was no safety haven bid for Treasuries for most of this week. Yields rose over 15bp across the curve. The Dollar saw strong gains this week on a confluence of haven bid and rising yields, though pulled back on Friday. It was stronger on all the major crosses, including other havens the Yen and Swiss Franc.

The conflict will of course be the focal point next week. CPI and PCE will headline the US economic data and JOLTS will provide a follow-up to this week's weak payroll report. Oracle, HPE, Constellation Software, Vail, Kohls, Dollar General, Dicks, Adobe, Rubrik and Ulta will be some of the prominent earnings reports. Lastly, the clocks move ahead one hour Sunday night. No excuses now. Take care and enjoy your weekend.