•Meanwhile in markets, this might feel like Groundhog Day, but oil and natural gas prices continue to dictate the direction of the bond, rates, equity, and fx markets. And with both crude oil and natural gas prices higher, bonds and equities inevitably feel the heat while the dollar remains bid;

•The good news is that Brent crude futures prices are off the highs, trading at $113.7 last. Earlier in the session we nearly reached the March 2 panic peak of $119.5. European natural gas prices are up ten percent or so following the tit-tat for that strikes on key Qatari and Iranian natural gas installations on Wednesday, which invoked a strongly worded response from President Trump calling on both Israel and Iran to cease such strikes;

•Elsewhere, US Treasury yields have edged higher. Since yesterday’s energy infrastructure strike escalation, yields are up 8-11bps across a bear-flattening curve. To add insult to injury, at yesterday’s FOMC presser Chairman Powell toned down rate cut expectations further, saying cuts only become viable once a durable downtrend in underlying inflation has taken old. But with the war, price risks are clearly to the upside;

•In the wake of the Fed and the turmoil in the Middle East, fed funds futures no longer fully price in a 25bps rate cut this year. A cut is only fully priced in more than 18 months out according to forward rates;

•Equities are hurting, with European bourses down around two percent. S&P 500 futures are lower too, though off the lows. The problem for the bulls, which includes yours truly, is that the ‘war is going to be short’ narrative is being shot full of holes literally day after day. Rhetoric from both sides remain heated or even bellicose (re President Trump), and with not even a few rays of hopes – think sources-based stories of background talks between the warring sides – every escalation gives markets more of a reason to throw a tantrum (crude prices higher, bonds and equities lower);

•A case in point is today’s ECB meeting. ESTR OIS are forcing the ECB to hike rates at gunpoint. Still, I think the ECB will keep its options open at today’s Governing Council meeting. Meaning, not teeing up a hike for the June ECB. But markets simply crave validation for the hike that is fully priced for the June ECB;

•The hawkish ECB repricing is wreaking havoc on Eurozone peripherals. In what I would dub the lazy man’s trade, peripheral spreads with Bunds are up strongly – a Pavlovian response to hawkish ECB repricing. However, this is not the South Europe of the (early) 2010s. North and South have traded places: primary fiscal surplus South, sizeable fiscal primary deficits North;

•Looking ahead, besides the usual Iran headlines watching, we have the Bank of England meeting at 13:00 CET, then the ECB at 14:15, and the Czech National Bank 15 minutes later. Should be all holds, and the question is how much the rhetoric will shift in a hawkish direction.

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