MNI US MARKETS ANALYSIS - Iran/Israel Fallout Seen as Limited

Highlights:

• Geopolitical risk premium spikes on Israeli missile strike in Iran
• Fallout seen limited, as both sides play down significance of attack
• BoE's Ramsden set to speak for first time this year

US TSYS: Still Finding Levels After Sizeable Paring Of Geopolitics Risk Spike

• Treasuries have pared significant gains seen overnight, the move initially on Israel’s counter-strike against Iran before the lack of meaningful damage to Iranian assets has seemingly resulted in little Iranian desire for an immediate response despite their pre-attack warnings, avoiding a worst-case scenario.
• Furthermore, Iranian nuclear installations were not damaged, but local press outlets in Israel have since run reports pointing to capabilities of launching more meaningful attacks on Iran, helping maintain richer levels on balance.
• Cash yields sit 4.3-6.5bps lower, led by 5-10Y tenors, whilst 2s10s at -37.3bps (-2.2bps) has pulled further away from recent highs of -28.2bps seen on Tuesday.
• TYM4 sits within wide overnight ranges at 108-06+ (+ 16) on huge volumes already above 1mn. It topped out at 108-22+, coming close to resistance at 108-25+ (Apr 12 high) but the bear cycle is seen remaining in play with support at 107-13+ (Apr 16 low).
• Data: No regular data releases today although the BLS releases state-wide labor data (1000ET)
• Fed: Goolsbee (’25) in SABEW Q&A but with prepared text (1030ET), Fed Financial Stability Report (1600ET). FOMC begins media blackout at midnight ET.
• No issuance.

STIR: Geopolitical Risk Impact Pared, But Fed Rates Still Lower On The Day

• Fed Funds implied rates have recovered much of their plunge lower overnight on latest Israel-Iran strikes, but still give back all or at least some of yesterday’s push higher helped in part by strong data and a hawkish Williams.
• Cumulative cuts from 5.33% effective: 1.5bp May, 5.5bp Jun, 13bp Jul, 24bp Sep and 42bp Dec.
• The dovish impact from the risk-off moves have been skewed towards near-term meetings, with meetings out to July 0.5-1bp lower than pre-jobless claims levels but end-2024 implied rates still higher.
• Goolsbee (’25 voter) is the sole scheduled speaker at 1030ET, appearing at the SABEW annual conference including prepared text. He has already spoken since CPI but we watch to see if he repeats Williams' "no urgency" for cuts.
• Goolsbee on Apr 12: multiple inflation readings higher than we want [referring to the past 2-3 months of CPI inflation]. Will feel a lot better if PCE inflation shows long arc of inflation continuing its way down, but if PCE reinflates, "we will stabilize the prices".
• He’s followed by the Fed’s Financial Stability Report at 1600ET.

US TSY FUTURES: OI Points To Relatively Modest Positioning Swings On Thursday

Yesterday’s move lower in Tsy futures and preliminary OI data points to a mix of long cover and short setting, with the former dominating in net curve DV01 equivalent terms owing to the movement in net positioning in FV futures.

• Net OI movement in other contracts was relatively contained, with conviction seemingly remaining low against a backdrop of heightened Fed & geopolitical uncertainty.

STIR: OI Points To Mix Of Long Cover & Short Setting In SOFR Futures On Thurs

The combination of yesterday’s move lower in SOFR futures and preliminary OI data points to a mix of net short setting and long cover across the strip, although net pack OIs don’t show much in the way of meaningful net positioning movement.

• OI in SFRH5 & M5 indicates that some fresh SFRH5/M5 steepener positions may have been set.
• Yesterday’s sell off was unwound on the back of the well-documented Israel-Iran matters, although the space is now comfortably off overnight highs (as covered elsewhere).

SECURITY: Iran And Israel Play Down Significance Of Israel Strike

Israel and Iran have played down the significance of an overnight Israeli strike on a military facility near the Iranian city of Isfahan. It is unclear the extent of the damage, but the attack, whilst hitting targets within Iran, appears to fallen short of the worst-case scenario of a major strike of Iranian nuclear or energy infrastructure.

• NYT reports: "State television in Iran said military and nuclear facilities in Isfahan were safe and broadcast footage of the city looking calm in the spring light. One newsreader there described the attack as “not a big deal.”"
• International security expert Charles Miller noted a prevailing analyst view: “It seems that actually both sides want to be seen to be doing something without actually undertaking the risks of doing anything that’s too provocative.”
• The attack appears to have fulfilled a key strategic deterrent objective for Israel by demonstrating Israel can strike targets within Iran, but restraining from a major escalation.
• Dana Weiss, a diplomatic affairs analyst for Israel’s Channel 12, said: “Israel can do elegant military maneuvers that are not noisy or cause significant military damage but which deliver the message Israel wants. And that is what we have seen them do.”
• A US official told Axios that Israel notified the Washington in advance, and said: "We were not surprised."
• The government of Egypt said in a statement it is, “deeply concerned about the continued mutual escalation,” and warned of the consequences of, “expanding conflict and instability in the region.”
• G7 Foreign Ministers, meeting again today in Italy, are expected to press Israel on stepping away for additional retaliatory strikes. The US will likely continue to use active Swiss and Omani diplomatic backchannels to lower tensions with Iran.

MEXICO: Positioning Dynamics Prompt Substantial MXN Slump Overnight

• Overnight geopolitical concerns prompted sharp moves in currency markets, with MXN the significant underperformer. Crowded positioning saw the flight to safety exacerbated and the Peso briefly registered losses of over 6% against both the greenback and the Japanese yen.
• Over the past few weeks, CFTC data has indicated positioning has become increasingly bullish MXN as its ongoing resilience appeared underpinned by attractive carry and low levels of implied vols.
• These dynamics have left the peso vulnerable to the shift in sentiment and the overnight price action displayed the substantial positioning squeeze in full effect. “As they say, carry and short volatility is like picking up nickels in front of a steamroller — that steamroller just started accelerating”, an analyst from Vanda research noted.
• Price action has subsequently stabilised, however, USDMXN remains 1.85% higher on the session. As we noted earlier, a number of resistance levels were pierced, and the pair remains close to 17.3860, the Jan 17 high. This level is an important reversal trigger and a break, if seen, would be a bullish technical development.
• We also noted on Thursday that Macquarie would short any new spike in volatility ahead, to bet on declines in USDMXN implied vol as EM central banks, including Banxico, have begun to defend their currencies through verbal rhetoric.

FOREX: Volatility Spike Fades as Israel Strike Seen as Limited in Nature

• Markets underwent a significant volatility spike overnight on Friday, as news that Israel had launched missile strikes on Iran underpinned concerns of renewed geopolitical risk in the Middle-East. Risk sold off sharply, putting the USD on the front foot, equities lower and the JPY markedly higher. Emerging markets currencies came under particular pressure, with the MXN among the most exposed to stop-loss selling to send the USD/MXN pair briefly higher by 6.7%.
• The market impact didn't stick, with the missile strike appearing limited in nature and closer to a warning shot rather than a declaration of protracted hostilities. As such, markets bottomed out to put USD/JPY ~80 pips above the overnight low and the greenback comfortably below the overnight highs.
• Headed into the NY crossover, markets are more sanguine. CHF is the firmest currency in G10, prompting another multi-month high in CHF/JPY. We wrote yesterday that this week's constructive price action in the cross turns focus to recent highs at 170.81. Japanese intervention risks naturally remain a concern for fresh longs, however the still historically low levels of realised vol in JPY could calm these concerns (one-week realised vols remain ~3 points below the rolling 12m average).
• There are no notable data releases set for Friday, keeping focus on the central bank speaker slate. BoE's Ramsden makes an appearance for the first time in 2024, while Fed's Goolsbee, ECB's Nagel and BoE's Mann follow.

OPTIONS: Expiries for Apr19 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0485-00(E1.4bln), $1.0600(E650mln), $1.0635-45(E1.6bln), $1.0675-85(E691mln)
• USD/JPY: Y155.00($1.7bln)
• AUD/USD: $0.6400-20(A$2.0bln)
• USD/CAD: C$1.3700($1.7bln), C$1.3775($645mln), C$1.3885($979mln)

EQUITIES: Extension Lower in E-Mini S&P Confirms Short-Term Bearish Conditions

Eurostoxx 50 futures have traded to a fresh S/T cycle low today. A bearish corrective cycle remains in play and the move down this month has allowed an overbought trend condition to unwind. The contract has breached support at 4858.80, the 50-day EMA and a key pivot price point. The clear break of this average signal scope for a deeper retracement and opens 4711.00, the Feb 19 low. Initial firm resistance to watch is 4933.00, the 20-day EMA. The short-term trend condition in S&P E-Minis is unchanged and remains bearish. Today’s extension reinforces current short-term conditions. The contract has this week cleared support at the 50-day EMA, signalling scope for a continuation lower near-term. Sights are on 4907.57 next, a Fibonacci retracement. Firm resistance is seen at 5181.29, the 20-day EMA. A clear break of the average would signal a possible reversal.

COMMODITIES: WTI Futures Reverse Majority of Overnight Spike, Bull Theme Intact

A bull theme in WTI futures remains intact, however, this week’s move lower signals the start of a short-term bearish corrective cycle. The contract has traded through the 20-day EMA and this signals scope for an extension towards the 50-day EMA, at $80.64. A clear break of the 50-day EMA would signal a stronger bearish theme. On the upside, key resistance and the bull trigger has been defined at $86.97, the Apr 12 high. The trend condition in Gold is unchanged and the outlook remains bullish with price continuing to trade closer to its recent highs. The latest rally maintains the price sequence of higher highs and higher lows and note that moving average studies are in a bull-mode condition, reflecting positive market sentiment. The next objective is $2452.5, a Fibonacci projection. Initial firm support is at $2301.6, the 20-day EMA.

Date	GMT/Local	Impact	Country	Event
19/04/2024	1415/1515		GB	BoE's Ramsden at Peterson Institute Conference
19/04/2024	1430/1030		US	Chicago Fed's Austan Goolsbee
19/04/2024	1530/1130		US	New York Fed's Roberto Perli
19/04/2024	1630/1730		GB	BOE's Mann Panelist at Capital Flows Seminar
19/04/2024	1700/1300	**	US	Baker Hughes Rig Count Overview - Weekly
22/04/2024	2301/0001	*	GB	Rightmove House Prices Index
22/04/2024	1000/1100	**	GB	CBI Industrial Trends
22/04/2024	1230/0830	*	CA	Industrial Product and Raw Material Price Index
22/04/2024	1400/1600	**	EU	Consumer Confidence Indicator (p)
22/04/2024	1430/1030		CA	BOC market participants survey
22/04/2024	1530/1730		EU	ECB's Lagarde Lecture at Yale
22/04/2024	1530/1130	*	US	US Treasury Auction Result for 13 Week Bill
22/04/2024	1530/1130	*	US	US Treasury Auction Result for 26 Week Bill