Geopolitical tensions between the US and Iran in the Middle East may remain elevated, but they have also not escalated further early this week. The threat of some sort of reprisal attack by Iran (either direct or indirect) is still likely, but with nothing immediately coming, markets are beginning to find the dust settling. Whilst some kay markets have become stretched (such as oil and gold), leading to the potential for retracements, for now, the added risk premium that has taken flow into safe havens, is still required. It will remain so whilst uncertainty remains of how a response by Iran will take shape. Despite this though, there is a degree of bounce back today. Treasury yields rebounded into the close last night, whilst equity markets are taking a lead on this to drive a recover today. However, there is still a questioning of the rebound this morning, as forex majors reflect a risk retreat again and Treasury yields slip back. Can this apparent contradiction continue? Something will need to give. Attention will also turn back to the PMIs once more, with the US ISM Non-Manufacturing in focus today.
Wall Street rebounded into the close last night with the S&P 500 +0.4% higher at 3246. With US futures also higher today +0.1% this has helped a broad bounce in Asia (Nikkei +1.6%, Shanghai Composite +0.7%). Markets in Europe are set to follow this rebound, with the FTSE futures +0.5% and DAX futures +0.6% higher in early moves. However, in forex there is a move back into safety, with JPY performing well, along with USD. On the flipside, AUD and NZD are suffering, whilst EUR is also dropping back slightly. In commodities, as the European session has got going, there has been a move back into gold again after yesterday’s late slip, however, oil is over -0.5% lower today.
The outlook of the US services sector will be key on the economic calendar today, along with the first look at Eurozone inflation. Flash Eurozone HICP for December is at 1000GMT with headline inflation expected to increase to +1.3% (from +1.0% in November) and core inflation staying at +1.3% (+1.3% in November). US Trade Balance for November is at 1330GMT with an improvement in the deficit to -$43.8bn (from -$47.2bn in October). The US ISM Non-Manufacturing is at 1500GMT and is expected to improve to 54.5 (from 53.9 in November) and will be particularly watched after the manufacturing disappointment last week. US Factory Orders for November are at 1500GMT with the notoriously volatile data expected to fall by -0.8% on the month (+0.3% in October).
Chart of the Day – German DAX
The bullish outlook for the DAX has been rocked in recent sessions as risk appetite has been hit from a rise in geopolitical r