The risk mood is looking rather dour as we look to get into European trading later. The US-Iran conflict continues to drag on, with no real progress over the weekend. And that is making for a very dicey start to the new week today.
Iran is now charging a toll for ships looking to pass through the Strait of Hormuz, and even then it will only be limited to exceptions to some of its allies. To those aligning themselves with the US, there will be no such passage. And while that is going on, the US naval blockade also continues to stay in place.
All in all, it doesn’t mean much. The strait remains in de facto closure with the only vessels passing through being small regional cargo ships, Iranian coastal ships, and a few Chinese vessels that are heavily escorted and permitted by the Iranian navy. And even then, the traffic from these ships still resembles a ghost town. The key thing remains that no oil and gas tankers are passing through.
As such, we’re bracing ourselves for another week of the status quo being prolonged. And the toll on markets is also starting to show up, more evidently in the bond market.
Treasury yields sold off heavily in the second half of last week with 10-year yields now shooting up to 4.62% and 30-year yields up to 5.14%. Both are hitting fresh one-year highs as the bond market is screaming that inflation worries are starting to balloon up and there will be a major toll on the economy.
And it is not just in the US, we’re seeing the same in Europe as well.
On Friday, 10-year bond yields in France shot up to 3.97% – its highest since 2009. Meanwhile, 30-year yields jumped up to 4.66% – its highest since late 2008. In Germany, 10-year yields jumped to 3.18% and 30-year yields to 3.68% – both the highest since 2011.
With fiscal worries already a major concern in the likes of France since last year, this latest episode is just piling on the pressure on Europe’s second largest economy.
In Japan, we also briefly saw 30-year yields hit 4.20% earlier today. If the government wasn’t all too worried about fiscal concerns before, they surely are now. And that just piles on top of the Takaichi trade that is continuing to run in the background.
In turn, we’re starting to see all of this translate to perhaps the start of a corrective move in equities.
After wiping out its weekly gains on Friday, US stocks are bracing themselves for another downbeat session later today. S&P 500 futures are lower by 0.6% with Nasdaq futures down by 0.5% currently.
Looking to Europe, DAX futures are down 0.9% while CAC 40 futures are down 1.5% at the moment.
It’s looking quite rough out there as other asset classes are finally starting to heed the warning signal sent out from the bond market.
This article was written by Justin Low at investinglive.com.
