The Winds of War Continue to Impair the Risk-on Trade and Force Bond Yields and the Dollar Higher
As the cost of the war mounts, a credit shock is also set to hit the economy — consumer finance stocks have collapsed by -26% from the nearby highs.
Key Takeaways
Geopolitical Risks Keep Rising: The war risks continue to escalate and take on new forms, with Iran now launching cyber attacks. Winning the war now no longer means regime change but rather reopening the Strait of Hormuz. Brent crude has moved above $100 for the first time since August 2022, with Iran also threatening to keep the Strait shuttered and reportedly laying down mines.
Global Bank Market Volatility Soars: Bond market volatility has broken out to a nine-month high and yields continue to nudge higher (4.27% for the 10-year T-note) — the JGB market is seeing a huge +7 basis point jump to 2.24% as dollar-yen makes an approach towards ¥160, and now stretching the weak end of the band in place for the past 40 years – helping push the DXY dollar index up a huge +50 pips to a three-month high of 100.2. Sterling has also faltered -0.5% as the U.K. economy disappointingly stagnated in January (consensus was +0.2%).
Credit Stress Starts to Accelerate: Concerns over a lengthy period of supply shortages due to the Iran war are now clearly mounting, and bumping against emerging fears about private credit and a domino effect on the Financial sector in general as a default cycle is set to accelerate. As always, the Financials are the proverbial canary in the coal mine and have collapsed -14% from the highs — back to where they were last April during the Liberation Day fiasco. Consumer finance stocks have tumbled -26%, and the regional banks are nearly back in bear market terrain (-19%). The asset management stocks are already there, having slid -23% from the nearby peaks, and there is no bottom in the overall market until the companies that manage the money in the market manage to find a trough.
