Geopolitical Fear Often Fades Fast

N.B. – I’m off for a couple of days at the start of next week, publication of this note will resume as usual from Weds 18th June (FOMC Day!)

WHERE WE STAND – Geopolitical concerns have shot back to the forefront of participants’ minds overnight, after a significant ratcheting up of tensions in the Middle East overnight.

This comes after a ‘pre-emptive’ Israeli strike on Iran, the culmination of days of reporting indicating that such an attack could be likely, with said attack targeting many targets, including some of Iran’s nuclear infrastructure, and having killed the IRGC Chief Salami. Unsurprisingly, Iran have vowed to responds “harshly” against both the US and Israel, though have also confirmed that there is – at the time of writing – no damage to either oil refineries, or storage tanks.

The market reaction has been as predictable as you can imagine. Crude benchmarks tearing well over 10% higher, with WTI briefly taking a look at $78bbl; gold surging, with the yellow metal rallying well over 1%; Treasuries gaining ground across the curve, though having already pared around half of the advance; equity futures diving, with spoos back under 6,000; and, lastly, the dollar catching a bid against most G10 peers.

While the situation remains highly fluid, and incredibly uncertain, I would caution that we have all seen this playbook – in terms of market reaction – play out numerous times in the past. Financial markets are always incredibly quick to price in geopolitical fear, but tend to be equally quick to discount it again, seeing the risk premium fade in short order.

Naturally, a day of headline-watching now awaits as participants brace for the likely Iranian response, as well as for any potential further signs of escalation. That said, and while some haven demand is obviously likely to persist as we move into the weekend, one must ask whether these geopolitical developments mean we should tear up our longer-term views.

In short, we shouldn’t.

The bull case for equities remains a solid one, with this weakness providing yet another dip buying opportunity for the bulls. Once markets have got bored of the aforementioned headline-watching, which if history serves won’t take too long, it is clear that the path of least resistance continues to lead to the upside, as stocks remain supported by a resilient US economy, solid earnings growth, and the direction of travel on trade continuing to be one that points towards calmer rhetoric, and deals being made.

There was, though, some degree of consternation yesterday over the weekly US jobless claims figures, with the continuing claims metric rising to a cycle high. I must say that I’m not especially worried on this front, as the data is more indicative of a labour market in stasis, where the pace of both hiring and firing is slow, as opposed to a jobs market that is crumbling to pieces. Fundamentally, the overall economic backdrop Stateside remains a solid one.

Meanwhile, in terms of those longer-run views, I continue to be a fan of gold, with overnight developments again how gold deserves a place in portfolios as a hedge in the present uncertain environment, and I still like bullion higher from here, particularly as reserve asset allocators continue to diversify their portfolios.

Sticking with commodities, I’d not be touching crude with a bargepole for the time being – longs will need to remain agile given the non-stop news flow emanating from the Middle East, while shorts, at least intraday, is somewhat akin to trying to pick up pennies in front of an oncoming steam roller. On which note, I can’t imagine many wanting to be short crude going into the weekend.

As for Treasuries, dip buyers seem to remain in the ascendancy for the time being, with the rally that kicked-off post-CPI on Wednesday continuing overnight as haven demand provided a helping hand. While it is notable that 4.5% in the 10-year, and 5.0% in the 30-year, have again proved attractive levels, I do wonder whether things might’ve run their course for the time being, especially with the FOMC looming next Wednesday, and with there being a decent chance we see the median 2025 dot nudged higher, pointing to just one 25bp cut before the year is out.

Finally, in the FX complex, it would appear that despite the millions of column inches – including some of my own – that the USD doesn’t act as a haven any more, when push comes to shove there is still little else that participants want to own. In fact, markedly higher geopolitical worries have seen the greenback bounce from the 3-year lows printed during yesterday’s session, which probably means that we’re back in a mindset of rapid risk aversion, and relatively rangebound trading, persisting for the time being.

LOOK AHEAD – A light docket ahead today, with it very nearly being time for a cold beer or three to round out the week.

Just two notable datapoints are on the calendar, though neither this morning’s eurozone industrial production figures, nor this afternoon’s UMich sentiment survey, should be especially market-moving, especially as participants continue to watch incoming news flow like hawks.

Besides that, the usual warning of potential gapping risk over the weekend must apply, especially with the high potential for geopolitical developments, as well as tariff news relating to the G-7 summit.