US Airstrikes Spike Market Volatility

By now, you know the US attacked and killed one of Iran’s top generals and sent global markets reeling in response to the threat of an “imminent attack.” Qassem Soleimani, who led proxy militias that extended Iran’s power across the Middle East, was killed in a strike in Baghdad authorized by President Trump. “We don’t seek war with Iran,” Sec of State Pompeo said in an interview on Fox Friday morning. “But we, at the same time, are not going to stand by and watch the Iranians escalate and continue to put American lives at risk without responding in a way that disrupts, defends, deters and creates an opportunity to de-escalate the situation.”… “General Soleimani was actively developing plans to attack American diplomats and service members in Iraq and throughout the region.” The financial markets reacted as we would expect; on the initial reaction, the DJIA dropped over 300 points in the futures markets, the 10 yr note dropped from 1.88% yesterday to 1.80%.

The killing of Soleimani will likely cause retaliation from Iran. The Supreme Leader Ayatollah Ali Khamenei is due to attend an emergency meeting of Iran’s Supreme National Security Council for the first time, the state-owned Hamshahri newspaper reported. He vowed to avenge Soleimani’s killing. Iran has been baiting the US for the last year, today Iran has to deal with the increasing reality that the US won’t sit still any longer. The chances of an escalation of tensions are very high now; Iran’s leaders can’t let this go without some serious response.

Stocks and global outlooks were increasingly positive about 2020. Investors continued buying even in an extremely overbought equity markets. Now we wait to see what Iran will do. The administration is signaling that the US is no longer going to tolerate Iran’s continual pricking the situation with their constant surrogate attacks across the mid-east.

By 9:00 am ET some retreat, the DJIA -248, the 10 yr at 1.83%. MBS prices a little better at 9:00 am EST +8 bps from yesterday’s close. This is all safety reaction, and although MBSs will follow, demand is for treasuries, not MBSs.

At 10:00 am EST Dec ISM manufacturing index expected at 49.1 from 48.1, the index dropped to 47.2; the reaction sent MBS prices from +9 bp to +17 bps. Nov construction spending increased 0.6% on estimates of +0.4%.

At 2:00 pm EST, the minutes from the Dec FOMC meeting will be released.

Already this morning, the volatility in the equity markets is high, and we expect that will continue through most of the day. The Iran issue is not to be dismissed easily, but investors remain with an insatiable appetite for stocks. Ten minutes after the DJIA opened -320, it was down just 215 points. It appears big money and investors are not as fearful about the escalation with Iran and how it is going to play out. The initial reaction looks mild, given the overbought equity markets and the response to the news this morning.

Source: TBWS