•Meanwhile in markets, we have entered the stage of panic selling in equities, credit, bonds, and currencies except the dollar. Surprisingly, even bullion is being dumped with reckless abandon;

•I still believe that this war will be short and come to an end in weeks given the US elections timetable and (likely) behind-scene-attempts at truces. In this regard, I see Iran’s attacks at GCC countries as an attempt to pressure them into pressuring the US to back off. But my armchair geopolitical ‘expertise’ be damned, the market is not so sure about a short war anymore. Yesterday’s relieve moves are fully erased;

•At pixel time, the Stoxx 50 was down almost three percent. S&P 500 futures are at the low of the day, with a decline of two percent from yesterday’s high. Selling is indiscriminate in the sense that on the Stoxx 600 even oil and gas stocks, which were up yesterday, are down by about one percent;

•On the charts, things are starting to look ugly. The Stoxx50 fell through the 50-DMA and is now testing its 100-DMA at 5,800. The next support level is the 200-DMA at 5,600;

•Yield curves are bear-flattening, with Bund yields up 4-7bps for the day. Eurozone peripheral spreads have started to widen, with BTPs and Bonos underperforming the most. Schizophrenic markets have swung from pricing in sizeable odds of an ECB rate cut last week to pricing in notable odds of an ECB hike in the summer. Twelve months out, around 15bps of hikes are priced in. For a change, the move in USD OIS is less spectacular. The low point of the forward curve has increased by *only* 10bps compared to last week;

•ECB rate hike pricing is not just premature but plain wrong. In 2008 and 2011, the ECB hiked rates on the back of rising commodity and energy prices. With well-known disastrous results. And yes, true indeed, the ECB hiked in 2022 when commodity and energy prices were also spiking. However, I view the 2022-2023 rate hike cycle as a rather desperate reversal of the pandemic’s fiscal and monetary largesse. Pandemic-era money printing drove inflation to such lofty heights, including commodity and energy prices. Regardless, nothing is preventing the ECB from repeating the 2008/2011 mistakes. In a perverse way, the market could be right by pricing in ECB hikes;

•Reading the tealeaves, ECB-speakers have given a lukewarm response to the hawkish repricing in OIS. Greek central bank head Stournaras was quoted as saying that the ECB should be in no rush to change policy and be “flexible” – code for looking through the energy price spike. Still, he’s clearly not ruling anything out – including rate hikes. Earlier in the day, an FT-published interview with ECB chief economist Lane that pointed to the central bank maintaining its hold stance;

•Elsewhere, I’ve clocked gold two percent lower at $5,280 or thereabout. Crude oil prices have increased further. At $82.50 a barrel, we’re dealing with a seventeen percent increase from Friday’s close. For the year, which is a better yardstick as crude oil prices had already reflected war fears by the end of last week, Brent is up thirty three percent. The price of natural gas according to the go-to Dutch futures are setting new highs while I type this sentence. At pixel time, we’re up about ninety percent from Friday’s levels;

•In spot FX markets, King Dollar reigns supreme – even the Swiss franc is down versus the greenback. On a broad trade-weighted basis, the greenback has rallied about a percent since the war broke out. In the crosses, EURUSD in the 1.16 is testing its 200-DMA while USDJPY in the high 157s is approaching the January highs;

•Regarding the war, Hormuz is probably the most Googled/AI-ed term these days. Traffic in the Strait that is so key to the world’s energy supply has nearly ground to a halt. A report on Al Jazeera earlier in the morning quoted analysts as saying that traffic is down at least 80% from its normal level. To make matters worse, the US has threatened to step up its attacks while Iran shows no sign of folding to US and Israeli military might;

•Looking ahead, we will be headline-watching Iran, of course. There’s a bit of ECB-speak and Fed-speak yet to come, but punters will only be interested in what our central bank overlords have to say about the monetary consequences of the war in Iran. The National Bank of Poland is expected to cut rates by 25bps today – but that’s according to pre-war consensus. If they hold rates instead, watch ESTR OIS soar further.

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