Tehran Turmoil Tanks Stocks & Bonds; Black Gold & Bitcoin Bid

Tl;dr: Oil prices up on the week... you know the rest! (Stocks down, bond yields up...more bigly, dollar up)... but notably bitcoin significantly outperforming bullion.

Day 14 of the Iran conflict...

Where to start? With oil, of course...

It has been difficult to concentrate on anything other than oil this week as the Iran conflict continues, the Strait of Hormuz remains largely shut to shipping traffic, and the world is operating with ~15% less oil coming to market than usual.

Coordinated efforts to stem the supply shock by releasing strategic petroleum reserves (SPRs) around the world helped to bring oil off of last Sunday's high near $120/bbl, but as markets came to realize that there is a flow restriction on how much of the SPR can reach the market in a given day (we estimate only ~3mbpd), front-month oil prices have steadily risen and are now back above $100/bbl.

...with Goldman pushing up their oil forecast above $100 for March as they see disruptions running larger for longer...

As we have done all week, here are the headlines that drove today's price action in crude:

• Overnight: Reassurances from Bessent that the Strait will be open as soon as militarily risk acceptable, India asks Iran to allow tanker armada through Hormuz - oil prices slipped lower

• 0800ET *IRANIAN SUPREME LEADER IS WOUNDED, LIKELY DISFIGURED, US SAYS - small rise in oil

• 0945ET *FRANCE AND ITALY OPEN TALKS WITH IRAN IN HOPE OF SECURING SAFE HORMUZ PASSAGE - FT - oil tumbled (later denied)

• 1015ET *Trump says US will be hitting Iran hard over 'next week' - oil rebounds modestly

• 1050ET *PENTAGON SENDS MARINE EXPEDITIONARY UNIT TO MIDDLE EAST: WSJ - oil jumps higher

• 1150ET IRAN GIVES APPROVAL TO INDIA FOR 2 LNG TANKERS TO SAIL THROUGH STRAIT – oil briefly dips, then reverses higher

• 1300ET *SAUDI ARABIA SAYS INTERCEPTED SIX DRONES OVER EASTERN REGION - oil keeps rising

• 1400ET *US Officials confirm Marine Expeditionary Force on way to Middle East - oil surges higher

• 1430ET *TOTALENERGIE: PRODUCTION SHUT DOWN OR IN PROCESS OF SHUTTING - Oil spikes to highs of the day

By the end of the day, WTI had reversed early losses to end the day in the green...

The week started with an explosion (pun intended) with probably one of the largest intraday oil moves in history Sunday through Monday. Since then, Brent oscillated above and below $100 for the last 24-36 hours before breaking out above that range this afternoon...

Finally, before we leave the oil complex, Vanda Research points out that USO (the Oil ETF) is now definitely a retail 'meme theme'...

Retail investors have been piling into the major pure-play oil ETFs ever since the start of the Iran conflict. 1M net retail buying of oil ETFs moved to a record high yesterday ($211mn), surpassing the prior highs set in May 2020. USO itself saw its third-biggest day of retail buying ever ($32mn vs. the record high of $42mn set on 06 Mar). While some on the street have been trying to fade the oil price spike, retail investors have so far been right to buy the dips this week.

Oil volatility (our simplest proxy for geopolitical chaos) remains stubbornly high...

And no one is backing away from the belief that oil remains elevate as R/Rs remain dramatically skewed to the upside over the next month...

Low conviction is the punchline, though. Bloomberg's Michael Ball reports that Capital Economics notes traders are about half as confident in their projections for oil prices as they were at the start of the year. In less volatile times, the market behaves like there’s roughly a 1-in-20 chance the most likely outcome is right. Right now it’s closer to 1-in-50, according to their research.

That doesn’t mean the expectation is for $120 again tomorrow, but the tails are fatter. Capital Economics’ read of options pricing implies roughly a 20% chance Brent is $100 a barrel or higher in three months. In other words, this market is trading a probability distribution — and paying up for the upside.

And where oil goes, so goes stocks (and bonds - even more so)..

Oil up since the start of the war means stocks down with Small Caps leading the decline, down 6% (and Nasdaq the prettiest horse in the glue factory)...

All the majors closed just above their 200DMAs...

The S&P well and truly 'broke the box' again...

Mag7 spent most of the week as a relative safe-haven but Thursday and Friday saw notable underperformance with both the S&P 493 and Mag7 down around 1-1.5% on the week...

Alts & BDCs had a tough week (starting to weigh on the broader financials)...

Over 40% of yesterday’s notional volume on the exchange was attributable to ETFs - implying very significant macro overlay/hedging flows.

As Goldman's trading desk notes, the past nine sessions have had an ETF value greater than 35% (we are tracking to continue today) of the tape, which is the second longest streak in our dataset.

Vol has remained notably low relative to the outsized ETF activity, the last time we saw 9 straight sessions of this kind of ETF activity, the VIX was north of 70.

Credit markets are really starting to crack this week, with credit risk dramatically decoupling from equity risk...

...with IG dramatically underperforming stocks...

Treasury yields surged again this week (up 15-17bps across the curve with very little rotation). Since the war started the long-end has modesty outperformed but the entire curve is dramatically (30-37bps) higher...

The 30Y yield closed right at its recent cycle highs...

Since the war began, rate-cut expectations have plunged from over 2 cuts to less than one (from 62bps to 20bps)...

The dollar has been almost incessantly bid since the war started...

Gold sank significantly the last few days, now at the post-war lows...

On the other side, bitcoin is at the post-war highs (testing $74,000 today)...

Bitcoin's gains relative to Gold since the war started are very notable...

...it appears a regime shift has occurred.

Finally, while it remains almost completely irrelevant for the day-to-day machinations of markets for now, this week saw 'hard' macro data disappoint while 'soft' survey data improved and stabilized with stagnant spending, GDP downgraded, and sentiment weaker...

But as macro signals weaken overall, and credit spreads and bond vols surge wider/higher, equities are actually outperforming...

So why are equities holding up? Bloomberg's Michael Ball offers three possible reasons:

• One possibility is that the prevailing wisdom in the stock market is that the oil spike is temporary. That’s a world where inflation data rises in the near term and policymakers signal cuts are delayed but ultimately on the table.

• Another reason may be that the credit plumbing hasn’t broken. Issuance windows are open, even if the motivation looks defensive. The US investment-grade market notched its biggest one-day issuance tally on record Tuesday, nearly $66b, with borrowers clearly trying to get ahead of any further deterioration in sentiment.

• The third is that private-credit stress still feels like a contained micro story to equity investors. The illiquid assets/semi-liquid liabilities problem is real, and redemption gates are worsening the broader optics on the space. Yet the equity market is waiting for clear signs that private credit stress will further weigh on public spreads, bank lending appetite and earnings.

However, the risk remains that the combination of higher oil and strain in private credit, which will keep pushing stock indexes lower. Oil-driven stagflationary pressure, rising rate vol from changing monetary policy paths and private credit angst can tighten financial conditions quickly, even if the real economy only softens slowly.

That’s especially true if central bankers go further into risk-management mode - where the bar to hike is high given uncertainty over the duration of higher oil prices, but the bar to sound hawkish just dropped on rising inflation expectations.

CTAs are sellers in all scenarios next week in the US. In a flat tape, they are notably sellers of ~$36mm US equities in a flat tape over the next week and sellers of ~$64mm over the next month.