•Meanwhile in markets, oil prices continue to set the tone for broader markets. With a flare-up of Iranian strikes on Gulf energy infrastructure and ships in the Strait of Hormuz overnight, oil prices predictably spiked, sending bonds and stocks lower;

•Brent crude futures jumped above $100 a barrel in the session before falling marginally from the highs. The International Energy Agency has said that the war is causing the biggest-ever oil market disruption – a warning to the US and Israel who both ‘own’ the crisis, with the emphasis on the former.

•To add insult to injury, the US, with all its military and naval might, does not control the strategic Strait. Several nations, including India and Bangladesh, apparently think little of talk of (US) naval escorts. Instead, they have requested safe passage through the Strait from Tehran. Whether Tehran can truly honor the requests remains an open question. We have seen unconfirmed reports that parts of the Iranian military – the Revolutionary Guards – have struck Oman – the mediator before the war – without Tehran’s approval. The irony is that Iran’s devolved command structure, designed to withstand decapitation strikes, can apparently go rogue. Which begs the question: even if there’s a deal between Washington and Tehran, or if Trump simply declares victory and moves on, will traffic in the Persian Gulf and the Strait return to normal? Regardless, I don’t think market care about the intricacies of the Iranian power structure. Punters are just waiting for Trump to TACO. Which I believe is still inevitable. An oil price of $120 a barrel is too painful and electorally risky for him;

•Turning to some market commentary, equities and bonds are both off the lows. In the greater scheme of things, the bond market has clearly turned the corner. With the winter rally in bonds having evaporated, Bund yields are up a stiff 4-26bps YTD across a bear-flattening curve. US Treasury yields are up by 3-17bps YTD, with the curve also bear-flattening. Eurozone peripheral bond spread tightening has reversed, and spreads are now where they were earlier in December. Which is still quite tight;

•Moves in ESTRs have been spectacular, frankly speaking. Weeks ago, we were contemplating a resumption of cuts on the back of an ever-weakening labor market and softer inflation. Markets have now nearly fully priced in a June 25bps ECB hike. That’s a bold call on the ECB not seeing through this negative supply shock but instead expecting no quick return to normal and durably higher energy prices. And with risks of further increases down the road. In any case, if those forwards are realized, I will dust off the 2008 and 2011 recession scenarios, when the ECB also tightened in the face of an energy price shock and helped bring about a recession;

•European equities are off the lows, with the Stoxx 50 down half a percent. S&P 500 futures have also rebounded and are starting to veer towards a flat open. The broad dollar is steady and gains for the greenback this week are very modest. EURCHF, the risk-off bellwether, has managed to stay above the 0.90 handle – the line in the sand for the Swiss National Bank;

•Looking ahead, besides daily Iran headline watching, markets will be eying on US jobless claims and monthly trade data. More important data arrives tomorrow: the Fed’s preferred inflation gauge and the job openings data, which should still point to a cooling labor market and keep those Fed rate cut bets alive.

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