War in Iran boosts the US premium - Our weekly cross-asset views

We are at day 7 of the Iran War and markets are highly reactive to war headlines and to energy price dynamics. But despite signs of regional military escalation, despite Iran strikes on the energy complex and the near complete halt of ship traffic in the Strait of Hormuz, markets are not into full risk-off mood so far on the assumption that war will not be a prolonged one (a view we share, see view Oil Market Update). Energy prices are obviously one of the key market risk gauge. Crude oil is up 19% wtd this is the sharpest weekly increase since the Ukraine war but at ~87$/bbl crude oil price remains well below the March 2022 level. TTF is up 65% at 52€/MWh (see Global Gas Market Update – Assessing the Impact of Qatar’s LNG Outage).Beyond energy, market reactions have been strong (especially Tuesday) but not in a panic mode with a lot of discrimination across regions. US equities are flattish wtd as the US dollar gains 1.4% wtd! EM equities are down 7% and underperform, while Europe and Japan shed 5%-6%. Credit spreads are super resilient and implied vols are up but not in severe stress. Our Risk perception index reached only 61% on Tuesday before decreasing to 56% today.The bond market reaction was pronounced: no flight to quality but on the contrary a sharp bear flattening early this week and a bearish trend as inflation fears increase and scale back Fed cut expectations and boosted Asia / ECB / BOE hike expectations (a view we do not share at this stage as most CBs do not react to short term shocks). Wtd, German/UST/Gilts 2y are up respectively 23/20/28bps, 10y up resp. 20/20/31 bps. Half of the 10y US and German nominal rate moves reflect higher inflation B/E, the other half reflect real rates (+11bps). The good US ISM numbers did not help (watch out for today’s NFP). Rates moves have been spectacular this week but rates so far remain in the trading range of the last months. Finally, a stronger US dollar and higher rates weighed on gold, down 3% wtd (no safe haven effect).