Market weakness persists amid escalating strikes that have expanded to target US bases in several Middle Eastern countries, following the death of Ali Khamenei. Although numerous news headlines suggest a mutual willingness to reach a diplomatic resolution, ongoing aggressive rhetoric from both President Trump and the remnants of Iran's leadership indicates that there is no solution in sight, particularly in the short term. Nonetheless, the markets remain generally calm, likely anticipating only a brief duration for the conflict reflected in the SPY and Stoxx trading only 1-2% below last week's highs.
Expectations for a short-term disruption in the Strait of Hormuz are also mirrored in Brent paring back its gains from the USD80 level. The post-escalation weakness in oil prices has likely been fuelled by heavily speculative long positions built up ahead of the weekend, as seen in elevated equity downside protection, suggesting the market was well hedged. Similarly, the VIX has retraced most of its daily spike, signalling a return to complacency mode, despite the substantial risk that the conflict could extend far longer than anticipated justifying keeping market hedges in place as the logical short-term play. While equity volatility subsides, rates volatility continues to rise in tandem with stress reflected in credit default swaps and the ongoing weakness in private equity.
Outside the attention on the Middle East, the key events for the week are the US NFP on Friday, for which the market anticipates +59k in headline jobs (prev. +130k) and +65k in private payrolls (prev. 172k) moderating from previous months strong growth led by private education, health services and construction. Other US data are the ADP payrolls (Wednesday) and retail sales (Friday). In the EU, inflation data will be in focus for the week.
In light of markets likely returning to complacency mode amid the hard-to-ignore geopolitical tail risk, we buy back the sold Mar26 1200 put leg in our ASML trade idea.