Market movers today
Geopolitical risks came to the forefront on Friday after the killing of Iranian top commander Soleimani in Iraq and will be on market participants’ radar in the near future.
In terms of data releases we have several PMI service data from euro area countries. Tomorrow we will get the important euro area inflation data print, where we already saw some country figures that were on the stronger side of expectations. On Friday we get the US jobs report, which will be very important, particularly in light of the weak US ISM number on Friday.
In Scandi we get PMIs from Sweden and industrial production and inflation data (Norway) later this week.
Selected market news
Focus remains on the escalating conflict between the US and Iran. Iran has announced that it will no longer abide by the 2015 agreement about enrichment of uranium and the Iraqi parliament has decided that US troops should be expelled from the country. Focus is on a possible retaliation from Iran as Trump in a tweet stated that the US would bomb 52 Iranian sites – a specific reference to the 52 US diplomates held hostage under the Iranian revolution – if Iran retaliates.
Middle East exchanges that were open yesterday fell up to 5% as uncertainty continues to rise in the region. In Asia, Nikkei is down close to 2% and US equity futures are down around 0.3% this morning. Oil has continued to move higher overnight and the Brent future is above USD70 a barrel, up USD4 since the conflict started. In the FX market we note that USD/JPY briefly dropped below 108 this morning; but is now above Friday night’s closing level again.
On Friday the negative opening in European equity markets was carried over to the US, but losses were modest with major US indices down less than 1%. Considering the equity rally in December and the weak ISM US manufacturing that fell to 47.2 in December, which is the weakest level since June 2009, the market reaction was relatively modest.
It seems that the bond markets’ reaction was more pronounced. 10Y US treasury yields are now down 10bp compared to the level prevailing before the attack. In Europe 10Y government bond yields were down 5-6bp across the board on Friday and we should expect some catching up this morning to the bigger drop in US treasury yields. Despite the poor risk appetite periphery markets did not underperform on Friday. This week we will see significant supply as Belgium, Portugal and Ireland are all expected to be in the market with syndicated bond deals that come on top of the normal scheduled supply.
We see a risk that the weekend’s events will be viewed as an escalation of the crisis and with a market waiting for a possible Iranian retaliation, uncertainty is expected to stay high. When we combine that with the weakening of the US manufacturing cycle it does not bode well for risk appetite the coming days.
