Markets on alert after reports of explosion near Iranian military base

In focus today

Today is a quiet day on the data front. We will monitor the situation in the Middle East after reports of explosions in the Iranian city of Isfahan which houses a military base. See more below.

In Sweden, the market is likely to continue to digest the messages from Riksbank's Bunge and Jansson yesterday, arguing the weaker SEK and delayed Fed monetary easing will influence the decision between a May and June rate cut. We believe this supports our take for the latter.

Economic and market news

What happened overnight

Reports of an explosion in Iran, near the city of Isfahan which houses a major military base, renewed fears about an escalation in the Israel/Iran conflict. Iranian officials say explosions were due to Iran's air defence system destroying three drones rather than missiles, Reuters reports. Israel has not commented, but Bloomberg reports Israeli officials had notified the US earlier Thursday that they planned to retaliate in the next 24-48 hours, according to two US officials who asked not to be identified discussing private conversations. Oil prices regained some of its earlier losses to hit 89.1 USD/bbl. (+2%) as of this morning, and safe-haven assets such as gold (+0.4%) and the CHF gained, while Asian equities slid. 

Japan nationwide CPI was largely in line with earlier Tokyo data, as the core CPI slowed to 2.6% y/y in March, and "core-core" CPI (excl. fresh food and energy) slowed to 2.9% from 3.2% in February. The moves were in line with market expectations.

What happened yesterday

More hawkish signals from the US, with the Philly Fed's prices paid index jumping to 23.0 in April (prior: 3.7) which markets took as another sign that price pressures are still too high. Flat jobless claims and hawkish comments from Fed officials once again pointed to fewer rate cuts this year. The greenback gained during the day and the US 10Y government yield was up 6bp as of last night.

In Japan, the fourth wage tally from Rengo showed a total pay rise of 5.2%. This is promising news for the Bank of Japan's hopes of sustained demand driven inflation. However, it is still unclear how broad-based these wage jumps will be, with signs that there will be a big pay rise gap between large and small businesses as a Teikoku survey showing 23% of surveyed businesses have not raised wages at all, meaning the effect on domestic demand may not be as great as the BoJ could hope.

Several ECB policymakers all but confirmed a June rate cut with Villeroy saying there was a "very large consensus" for a June cut, and ECB VP de Guindos stating the central bank would be "ready to reduce the restriction" of monetary policy if things evolve as expected. Things are less clear for the meetings in between quarterly projections. Villeroy, Simkus and Cipollone have all suggested that July is not off the table while others (Knot) have indicated potential cuts will coincide with new quarterly forecasts.

Metal price indices continued to trend up with the LMEX index up 1.5% for the day. The turn in the manufacturing cycle has been supporting metal prices which have increased for a while now (LMEX +13.1% YTD). On top of this, new US and UK sanctions on Russian metals have given supply-side pressure. Rising commodity prices are an upside risk to inflation and thus could complicate the outlook for global rates.

Equities: Global equities were lower again yesterday increasing the streak of losses to 5 days with MSCI world being down almost 5% from the peak. Sell-off again led by US tech sector, growth, and long duration stocks. While the sell-off initially happened alongside higher yields and increasing VIX, that has not been the case the last couple of days when yields have been moving more sideways while VIX has been ticking lower. In US yesterday, Dow +0.1%, S&P 500 -0.2%, Nasdaq -0.5% and Russell 2000 -0.3%. Markets in Asia are lower this morning, though off their lows as the Middel East crisis and uncertainty has increased this morning after Israel launched a retaliatory attack on Iran. Futures in US and Europe are lower this morning as well.

FI: Long-end rates drifted higher in yesterday's session as Philly-Fed confirmed the recent signs of a global manufacturing rebound taking place. The UST curve flattened slightly from the front end with the 10Y tenor peaking at 4.65%. 10Y Bunds ended the session 3bp higher at 2.50%. Overnight, the Israeli attacks on Iranian territory have led to a classic risk-off reaction in markets with Asian equity indices down, oil prices rising (Brent briefly above USD90) and bonds gaining traction (10Y USTs now at 4.55%). The risk of further escalation will be today's focus.

FX: Safe haven currencies rallied alongside US Treasuries, Brent oil temporarily moved back above USD 90/bbl and equities took a dive as the conflict in the Middle East escalated overnight. Some of the initial moves have reversed though. EUR/USD tested the downside but remains within 1.06-1.07. USD/JPY dropped sharply but is back above 154. USD/CHF knee-jerked toward 0.90 but has recovered closer to 0.91. Scandies in general came under pressure. USD/SEK made a new year high at 11.03 but is back below the 11.00 mark.