Written Commentary
MACRO FRAME
Not surprisingly, treasury bonds have streaked higher given the rapid escalation of economic uncertainty following the strikes against Iran and what could now be labeled as a “regional conflict” (as Iran has lashed out at neighboring countries via missile attacks). Therefore, the upside breakout in treasuries (which matches the highest trade since last April) is clearly justified, especially given the backdrop of generally soft global data and very sharp gains in many flight to quality instruments. On the other hand, looking ahead to the coming wave of monthly US jobs data it is possible that treasury prices will run into fundamental resistance before or shortly after they test multiyear highs up at 122-05 in June bonds. Similar upside resistance targeting in June treasury notes is 115-07. However, expectations for slightly improved US jobs related data starting on Wednesday (ADP employment change which is expected to be 45,000 versus 22,000 in the previous month) could put the brakes on the rally after the Iranian situation has been adequately priced today and tomorrow.
Not surprisingly, the US dollar leapt higher overnight in a classic flight to quality reaction to the US and Israel attacks on Iran, but expecting the dollar to extend beyond the overnight high probably requires better than expected data from the US jobs front. However, the currency markets lack a definitive fundamental story among the largely traded global currencies, and it is possible the dollar will carve out more hard-fought gains until hostilities cease.
The path of least resistance in US equities is clearly down but the magnitude of losses seems undersized relative to the level of geopolitical conflict in the Middle East. In fact, the lack of a major spike down extension this morning following the early February negative shift toward the key AI/tech/software sector, almost no support from the US Fed expected for months and at best mixed data that should have been a perfect environment for a wholesale liquidation in equities.
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