Israel-Iran War Tensions Drive Rush to Bonds, Impact Stocks

Via Syndicated Feed

Cover Image Attribute: Demonstrators burn an Israeli flag during the funeral of seven Islamic Revolutionary Guard Corps members killed in a strike in Syria, which Iran blamed on Israel, in Tehran on April 5, 2024. /Source: ATTA KENARE / AFP

The financial markets globally experienced turbulence due to an escalation in geopolitical tensions. Stock prices declined, prompting investors to seek refuge in safer assets like bonds and the dollar. Meanwhile, oil prices surged.

Stock markets witnessed their most significant downturn since January following reports that Israel was preparing for a potential attack from Iran on governmental sites. The Israel Defense Forces (IDF) reported approximately 40 missile launches originating from Lebanese territory, with some intercepted. US President Joe Biden expressed his anticipation of a potential Iranian attack on Israel in the near future, warning Iran against such actions with a firm message of "don't do it."
According to Matt Maley at Miller Tabak, investors have shown excessive complacency toward geopolitical concerns.
Maley remarked that since gold and oil have already priced in a significant impact on the market due to the crisis, the stock market could soon follow suit and experience a notable reaction.
On Friday, the S&P 500 declined by 1.5%, with losses led by banks and chipmakers, resulting in its largest weekly drop in 2024. Treasury 10-year yields decreased by seven basis points to 4.52%. Andrew Brenner at NatAlliance Securities also mentioned "massive short covering" and rate locking in anticipation of a surge in bank debt issuance after earnings.
The dollar had its strongest week since September 2022. Brent oil settled above $90, while gold briefly surpassed the $2,400-an-ounce mark before retracting its gains.
Treasuries experienced a significant rally after the market endured its most challenging two days since February. During these two days, yields reached highs for the year following inflation data that dashed hopes for Federal Reserve interest-rate reductions in the current year. Two-year yields, which briefly exceeded 5% earlier in the week, sharply declined on Friday.
Fawad Razaqzada at City Index and Forex.com commented, "Risk was off the menu on Friday. Investors were lighting up on risk exposure ahead of the weekend, fearing risk assets could gap lower should something happen."

The Mounting Pressure

Commerzbank analysts, including Carsten Fritsch, suggest that a direct clash between Israel and Iran would significantly intensify the Middle East dispute and result in a considerable surge in oil prices.
Rising geopolitical tensions, particularly in the Middle East, along with incidents such as Ukraine's attacks on Russian energy facilities, have fueled bullish activity in the oil options market. Recently, there has been heightened purchasing of call options, which benefit from price increases, leading to a significant increase in implied volatility.
According to Jose Torres at Interactive Brokers, recent events highlight the susceptibility of investor sentiment and elevated stock valuations to geopolitical tensions, ongoing inflation, and oil price fluctuations.
Torres observed that investors have postponed their anticipation of the Federal Reserve's easing measures, with geopolitical concerns potentially supplanting the Fed as a primary driver of market volatility.

SITREP: Wall Street Earnings

At the onset of Wall Street's earnings season, the financial results of major banks provided insights into the current state of the US economy amidst uncertain interest rate trends influenced by ongoing inflation.
JPMorgan Chase & Co. and Wells Fargo & Co. reported net interest income, reflecting their earnings from lending, which fell short of expectations due to rising funding expenses. However, Citigroup Inc. exceeded analysts' profit forecasts, attributed to increased corporate borrowing from markets and heightened consumer reliance on credit cards. These trends suggest that prolonged periods of elevated interest rates will likely be advantageous for major banks.
JPMorgan's Chief Executive Officer, Jamie Dimon, remarked that while several economic indicators remain positive, the group is attentive to various significant uncertainties moving forward. He mentioned concerns such as ongoing conflicts, escalating geopolitical tensions, persistent inflationary pressures, and the impacts of quantitative tightening.

Recent Economic Indicators

Meanwhile, the most recent economic indicators failed to shift the diminished risk appetite on Friday, with consumer sentiment declining as inflation expectations increased.
Larry Fink, the Chief Executive Officer of BlackRock Inc., expressed his anticipation of the Federal Reserve cutting interest rates at most twice this year, noting the challenge the central bank faces in containing inflation.
Fink told CNBC that he would consider it a success if the inflation rate reached between 2.8% and 3%, surpassing the Fed's 2% target.
Pacific Investment Management Co. cautioned that if US inflation were to rise, the Federal Reserve might revert to considering interest rate hikes, prompting the asset manager to favor purchasing bonds in alternative markets.
Mohit Mittal, Pimco's Chief Investment Officer for core strategies, expressed this sentiment in an interview on Bloomberg Television: "If inflation begins to resurface, there is a chance that the Fed might opt for rate hikes instead of implementing cuts."
Traders also monitored recent statements from Federal Reserve officials. Many emphasized on Friday that there is no immediate need to reduce interest rates, citing ongoing inflation concerns and a strong labor market.
Susan Collins of the Boston Fed and Mary Daly of the San Francisco Fed echoed this sentiment. Raphael Bostic of the Atlanta Fed reiterated his expectation for a single rate cut later in the year, while Jeffrey Schmid of the Kansas City Fed indicated a preference for a cautious approach to rate reductions.
As expectations regarding the timing and pace of initial rate cuts fluctuate, UBS's Chief Investment Office anticipates increased volatility in yields in the short term. However, they emphasize that the key takeaway is the Federal Reserve's commitment to initiating easing measures this year.
With the Fed's need to raise rates further unlikely, the CIO maintains a positive stance on high-quality bonds.
Solita Marcelli, from UBS Global Wealth Management, stated, "We continue to favor quality bonds in our global portfolios and recommend investors lock in attractive yields before rates fall this year," She added, "We like those with 1–10-year duration, as well as sustainable bonds."
Marcelli suggested that investors should also consider actively managing their fixed-income exposure to enhance diversification.
With reporting by Bloomberg
IndraStra Global Staff has not edited this story, which is auto-generated from a syndicated feed.

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