Submitted by Molly Schwartz, Cross-Asset Marco Strategist at Rabobank
We have maintained the view that markets are sorely underestimating the impact that the war in Iran will have on global economies and financial markets, and thatone day there would come a reckoning.While markets are still highly volatile and the situation in the Middle East highly uncertain, yesterday’s price action suggested that some traders are getting a reality check.
Remember folks, we’re still in a ceasefire!The iffy terms as to whether other countries in the region like Israel, Lebanon, and the UAE were fair game were never decidedly concluded, though the Strait of Hormuz was expected to remain open.
The drone attacks came after announcements from FARS early in the morning yesterday that the IRGC had struck an American warship near Jask Island, around 160km from the chokepoint (that’s 100 miles in freedom units).CENTCOM immediately denied that any US military assets had been struck, but the warship did appear to be associated with the UAE.
The drone strikes escalated further, with Iran attacking critical energy infrastructure in the UAE, including drones striking the Fujairah port—the first such attacks against the UAE in nearly a month, though these were not the first attacks targeted in Fujairah since the onset of the war. Iranian state TV quoted a military official who said that there had been “no premeditated plan to attack oil facilities in UAE’s Fujairah,” but rather it was the “result of the US military’s adventurism to create passage for illegal ship transit” through the Strait.
Trump announced that the US would spearhead an initiative called “Project Freedom” to escort ships who are “neutral and innocent bystanders” out of the Strait. There have yet to be concrete details provided, though the process technically began yesterday morning “Middle East time.” According toBloomberg,the lack of clear assurances has left “several shipowners” skeptical, so it may take a while before we see anyone take up the Administration’s offer for “clear passage.”
US Treasury yields surged higher yesterday in a bear flattening fashion, with the 2 year up 8.3bp, approaching the 4.00% level, while the 10 year climbed 7.2bp to approach 4.50%.This comes as brent crude oil grinded back to $114/bbl amid the escalation in regional tensions.
With tensions escalating,US 2 year breakevens have also started climbing higher, breaking their highest level since April 8.Meanwhile,5-year, 5-year inflation swap forwards have been heading higher as well, breaking their highest level since February 13 at 2.45%.The US OIS curve is reflecting this increased market hawkishness as well, now suggesting around 8bp worth of Fed hikes by year end.
We have posed the idea that the existence of what appears to be the world’s worst ceasefire comes as US efforts to de-escalate so as to escalate down the line. It also appears that the Trump Administration may have beenderegulatingto regulate.
In other news, theNew York Timesreported that the US is considering “vetting AI models before they are released.” This comes several weeks after anemergency meetingwas hosted with leaders from major institutions, including Powell and Bessent, after it was discovered that Anthropic’s newest unreleased model, Mythos, posed serious cyber security issues if leveraged by malicious actors.
Source: ZeroHedge News
