Will geopolitical issues become the predominant market narrative? Until Friday the Middle East was only a conversation having limited market impact. War is perhaps the most unquantified event of mankind. The unintended consequences are huge where even the most thought-out plans can go wrong at the onset.
Lat week was an incredibly volatile week for the Treasury market. Tuesday yields moved lower on dovish speak from the Federal Reserve. Wednesday was a stronger than expected reading on the CPI which sent long dated bond prices lower by the greatest amount since March 2020. Friday yields dropped because of geopolitical tensions, perhaps on a partial flight to quality.
It is believed the major financial stability risk right now might be the unusual volatility given the lack of liquidity and market anchoring entities that used to step up in times of volatility.
Some have suggested the markets are working efficiently because a crisis has not occurred in this period of intense volatility. Liquidity is defined as the ability to buy or sell a bond without moving the markets. Any fixed income traded would adamantly state that liquidity is indeed lacking as even a small bid or offer wanted can move prices considerably.
Bloomberg writes the price swings in the world’s largest Treasury ETF exceed those of the biggest stock fund this month by the most at least 2005.
Writing it differently, US Treasuries are supposed to be the steady part of the portfolio, insulated from the stock market’s daily drama. By the measure discussed above, the swing in bond prices has and is expected to keep exceeding those for equities by the most in 18 years.
It is often written that intense volatility tends to break things.
Commenting on Friday’s markets, for the exception of energy and financials, equities declined Friday as Israel prepared for a ground invasion. There is posturing throughout the world for such an event. Energy rose for the obvious reasons—Middle Eastern unrest. Financials rose because of strong earnings results from several mega sized banks.
What will happen this week? Earnings season accelerates as 11% of the S & P 500 are to post results.
The economic calendar is comprised of retail sales, industrial production/capacity utilization, several housing statistics, the Index of Leading Economic Indicators and a sentiment survey.
Last night the foreign markets were mixed. London was up 0.44%, Paris up 0.14% and Frankfurt up 0.08%. China was down 0.46%, Japan down 2.08% and Hang Seng down 0.97%
Futures are bifurcated as Dow futures are up 0.4% and NASDAQ futures are flat. Oil is also flat. Middle East tensions are rising in narrative and concern. The 10-year is off 4/32 to yield 4.70%.
