Morning Bid: Markets unsettled by Israel-Iran tit-for-tat

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[April 19, 2024]  A look at the day ahead in U.S. and global markets from Mike Dolan

It was hardly unexpected, but Israel's missile strike on Iran on Friday confirms fears of a dangerous series of tit-for-tat retaliation ahead between the Middle East powers that is likely to seed weeks of uncertainty for world markets too.

Heading into another weekend wondering what may happen in the region until global exchanges reopen on Monday is set to be pattern until the standoff is resolved. Concern about targeting of either country's nuclear operations is top of many minds.

Against that backdrop, the reaction of oil prices, global stocks and traditional safety trades so far on Friday has been relatively modest. That's partly as a senior Iran official told Reuters that Tehran has no plan to strike back immediately while state media there had an initially subdued response.

U.S. crude initially popped about 4% higher on the news to $86.3 per barrel - but stayed well shy of the year's high and reversed virtually all that gain since. To keep it in context, year-on-year oil price gains are still less than 5%.

It was similar for gold, whose initial surge failed to hit new records. It also unwound the gains since.

The dollar, which has tended to get both a safety bid in this geopolitical episode as well as track oil prices as something of a petrocurrency, also made limited gains. The traditional safety features of Japan's ailing yen or Swiss franc were less visible.

World stocks, weighed down more generally by U.S. interest rate concerns and a patchy corporate earnings season, fell broadly but major bourses were down less than 1%.

If it ended here, that may all seem well contained.

But with U.S. stock futures in the red again on Friday and the S&P500 on course to record six straight days of losses for the first time since 2022, there's clear anxiety building on Wall Street.

With the S&P500 now off 5% from record highs in less than three weeks, the VIXVIX> 'fear gauge' of implied volatility soared above 20 on Friday for the first time since October.

A bigger conundrum for investors is how to play U.S. Treasuries right now - caught between seeing sovereign bonds as a haven in times of global conflict and the increasingly hawkish stance of the Federal Reserve.

Two-year Treasury yields are testing 5% again - little over quarter of a percentage point below where the Fed policy rate of 5.25-5.50% currently stands. They fell back only briefly on the strike on Iran earlier and stand at 4.97% ahead of today's bell.

To the irritation of some other major central bankers attending the International Monetary Fund meetings in Washington this week, Fed officials continue to signal they are in no rush to cut interest rates this year as they snuff out stubborn vestiges of the recent inflation spike.

"I definitely don't feel urgency to cut interest rates," New York Fed boss John Williams said on Thursday.

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People walk around the Financial District near the New York Stock Exchange (NYSE) in New York, U.S., December 29, 2023. REUTERS/Eduardo Munoz/File Photo

The ongoing strength of the U.S. labor market and business activity was visible again on Thursday in sub-forecast weekly jobless claims and a Philadelphia Fed survey ahead of expectations.

The European Central Bank, by contrast, seems nailed on to start cutting its policy rates as soon as June.

In the corporate world, Big Tech is replacing the banks on the top of the earnings diary but the reaction to the updates is unsettling there too.

With geopolitical concerns of its own, Taiwan's main bourse was the big underperformer overnight and dropped almost 4%. TSMC's Taipei-listed shares tumbled almost 7% on Friday following the company's first-quarter earnings report in which it dialed back its expectations for chip sector growth and did not revise up its capital spending plans.

Video giant Netflix's shares fell after the bell on Thursday after it unexpectedly announced it will stop reporting subscriber numbers each quarter, seen as a sign that years of customer gains in the streaming wars are coming to an end.

Even though it reported a surprisingly large 9.3 million new customers for the first quarter, Netflix gave a revenue forecast that missed analyst targets.

Electric vehicle behemoth Tesla continues to alarm investors, with its shares down 2% again ahead of Friday's bell and after five straight declines that have seen them lose almost 40% for the year so far to a 15-month low.

There was better news for some of Europe's leading firms, with shares in L'Oreal jumping 5% after the beauty company posted a nearly 10% rise in first-quarter sales on a like-for-like basis.

Key diary items that may provide direction to U.S. markets later on Friday:

* US corporate earnings: American Express, Procter & Gamble, Schlumberger, Fifth Third Bancorp, Huntington Bancshares, Regions Financial

* International Monetary Fund's Spring meeting in Washington

* Chicago Federal Reserve President Austan Goolsbee speaks. European Central bank policymaker Joachim Nagel speaks. Bank of England Deputy Governor policymaker David Ramsden and BoE policymaker Catherine Mann speak. Bank of Canada Governor Tiff Macklem speaks

(By Mike Dolan, editing by Andrew Cawthorne)

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