The market has produced a classic safe haven play on the back of the breaking missile reports in the Middle East.
Treasuries, gold, and oil have all spiked, while equities and risk-sensitive FX have moved lower.
Since the initial attack last October, traders have formed a habit of producing kneejerk reactions on each piece of concerning news, before unwinding them just as quickly by the time that the headlines have fizzled out.
For the conflict to have a material and long-lasting impact on the market, this needs to become a broader war with a significant impact on the global economy through constrained oil supply or rising shipping costs, for example, which could upend the current expectations for a rapid rate cutting cycle in most developed markets.
There is justification for concern, but I suspect that the attack is less of a provocation of war and more of a signal that Iran is not sitting back and doing nothing as its most important proxy is severely weakened. Neither has any strong motivation for the sort of regional war that would trigger a meltdown.
Meanwhile, a mixed bag of US data has nudged Federal Reserve pricing this afternoon. The JOLTS job openings figure ticked back up to 8.04M, but markets appear to be taking note of the dip in the quits rate to 1.9%, which is the lowest in over four years and corroborates the fall in confidence that we’re seeing in the consumer surveys.
The ISM manufacturing index remained unchanged at 47.2. Here, it’s the slide in the employment index from 47.1 to 43.9 that is most consequential for the Fed, and the market has upped the implied probability for a 50bp cut in November back up to 40%. However, neither of these data points is going to tip the balance in isolation – policymakers are going to be looking to Friday’s payrolls report.
