Rallies in Equities Likely to be Shortlived This Week: 3-Minutes MLIV

Summary

• US stock futures are positive, aided by lower bond yields, while European futures are negative but improving.
• Middle East tensions (Iran-Israel conflicts) pose a risk to Saudi oil exports; Bloomberg Intelligence estimates a potential $15-20 per barrel spike in Brent crude if disruptions occur.
• S&P 500 has consistently closed higher only at the week's end during the conflict; a similar pattern is expected this week.
• Central bank hawkishness may be peaking, as higher energy prices are not boosting ECB rate hike bets, breaking the mechanical link to inflation expectations.
• ECB members Villeroy and Schnabel are urging patience or taking a measured approach, indicating a shift towards more cautious monetary policy.
• Upcoming data releases (ESM and March payrolls) could drag front-end yields lower if they come in soft, reinforcing the trend of declining yields.
• European back-end yields remain vulnerable due to potential supportive measures from squeezed balance sheets.
• Bank of Japan's verbal intervention on the yen is seen as ineffective; any yen rallies are likely short-lived due to fundamental terms of trade shock from higher energy prices and negative real rates in Japan.
• The news flow for the week is negative, centered on US-Iran talks with a deadline next Monday, but negotiating positions are far apart, limiting market optimism.
• The breakdown in the correlation between higher energy prices and increased ECB hike bets suggests a nuanced market adjustment to inflation risks.