S&P 500 Shakes Off US Bombing of Iran — Crude Oil and Natural Gas Give Up Gains

Also, 10-year T-note, gold, crude oil and Japanese yen futures

1. S&P 500 E-mini futures (/ES): +0.3% 
2. 10-year T-note futures (/ZN): +0.2% 
3. Gold futures (/GC): +0.38% 
4. Crude oil futures (/CL): -0.08% 
5. Japanese yen futures (/6J): -0.86% 

The shocking news over the weekend may not be that shocking after all — at least for the markets. While the US bombing of Iranian nuclear facilities provoked opening gaps by the time the futures market reopened on Sunday night, traders have shrugged off the opening prints. Crude oil prices, up over 5% at the open, are now in negative territory on the day. Likewise, natural gas prices (Iran produce s 6% of global supply) have erased their gains. US equity markets are firming up as the session proceeds, while bonds are up. Will Iran close the Strait of Hormuz? Traders are saying no. 

The brief bout of volatility that hit the tape at the futures open at the start of the week has since evaporated; IVRs for the major US equity indexes are on the cusp of hitting their lowest levels since Israel and Iran began their war on June 12. The S&P 500 (/ESU5) and Nasdaq 100 (/NQU5) have been competing for the spot of top performer, which absent a broader regional or global conflict, makes sense: How much revenue do American companies derive from Iran? The answer won't surprise you: around 0.003%, according to publicly available data.

Bonds may be getting a latent safe haven bid, although given broader cross-asset performances, one might surmise that traders are looking at the collapse in oil prices and instead reducing inflation expectations across the Treasury curve (especially at the long-end, with 10s (/ZNU5) and 30s (/ZBU5) gathering pace). The short-end and belly of the curve are in focus over the coming days, with two-, five- and seven-year Treasuries on the auction bloc Tuesday through Thursday, respectively.  

The rebound in risk appetite over the course of the morning is doing little favor to the metals, which one might argue are proving sluggish. After all, with central banks buying gold at a torrid clip and geopolitical instability at the highest levels since the peak of the first Cold War (it’s this analyst’s opinion we’re in a very warm phase of Cold War II). But shouldn’t gold be doing better? Narrative aside, the technicals remain a reliable guide: gold prices (/GCQ5) has closed above their one-month moving average (daily 21-EMA) every session since May 20. 

A remarkable turn in energy prices since the Sunday open now sees crude oil prices (/CLQ5) and natural gas prices (/NGQ5) in the red for the day. The US strike on Iran stirred fears that the Iranian Navy would mine and blockade the Strait of Hormuz, a long-held threat dating back to the Tanker Wars of the 1980s. Here’s the rub: the major shipping lanes through the Strait of Hormuz now run through Oman’s territorial water. Iran would have to restart the Tanker Wars to have a material impact, but consider this: If Iran blocks Gulf states from oil trade, retaliation against Iranian export facilities is almost guaranteed. IVR for crude oil is at its lowest level since the Israel-Iran war began. 

Demand for the US dollar remains firm on the other side of the weekend, with the notable loser emerging as the Japanese yen (/6JU5). Typically, the yen enjoys haven flows during periods of geopolitical distress, but it’s worth noting that as an island nation that imports over 90% of its energy, volatility in energy prices have explicit downstream impacts for the currency and inflation. That’s not to mention that positioning in the yen remains extreme: Relative to the past 20 years, speculative yen long positioning has a Z-score of +2.937. 

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater

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