TACO time? US greenback and Treasury yields give again positive aspects

I’m on board with the reversal in markets today.

I think there is something of a news overload that the market is dealing with. Obviously, there were parts of the market that didn’t like what Powell said yesterday but it shouldn’t have been a surprise. If anything, the dots should matter and they still show a rate cut but market pricing has now moved to unchanged.

I tend to think the market is one day behind right now and is realizing the scope of the Iranian attack on Qatar LNG and other gulf facilities. What’s worrisome about this is that Iran clearly still has the capability to inflict major damage to the world economy and that’s a huge lever they can use going forward.

But that was yesterday’s trade. Overnight, Trump signalled an end to energy strikes and that underscores an unwillingness to escalate this war in general. And it didn’t just appear to be a whim, Treasury Secretary Bessent said the US was looking at removing sanctions on Iranian oil on water.

There is a fair chance that we are days away from a major de-escalation as the US does not appear to want an energy war. There is a question about what Israel wants but you have to imagine that Trump could put an end to Israel’s attacks if he wants.

With all of that, we’re seeing a pretty big turn in the front end. Here are two-year yields intraday, which have come in by 9 bps from the highs at the start of US trade.

Now some of this comes with the UK blowing out following the BOE. That’s been unwound slightly as well after a post-decision interview with BOE Governor Bailey said “markets are getting ahead of themselves” in pricing in nearly 3 rate hikes this year.

But whatever markets are pricing stems from the war in Iran and how long it lasts. The pressure from US allies to wrap this up must be intense right now but we will see where it ends up as it’s all in the hands of one man. Fortunately, he listens very closely to markets and the S&P 500 is at the lowest since November.

Similar to yields, we’ve seeing some fairly heavy selling of the US dollar in the past hour. It leaves the impression that markets are sniffing out a TACO.