Geopolitical conflict and hawkish data jointly weigh on risk assets

Overview

This report is Deutsche Bank's Early Morning Reid macro strategy morning note, focusing on geopolitical shocks, energy prices, U.S. rate expectations, global equity market performance, and key economic events for the day. The report argues that there are still doubts over whether the U.S.-Iran ceasefire is effective, and that oil prices, after falling intraday, moved higher again. Combined with strong U.S. inflation and labor data, this has led the market to reprice a more hawkish Fed path and caused a pullback in risk assets.

Core views

The core views include: first, ceasefire uncertainty and risks related to the Strait of Hormuz are keeping energy prices highly sensitive, with Brent crude moving back above around $101 per barrel; second, U.S. inflation expectations and labor market data came in stronger than expected, putting pressure on rate-cut expectations and leading the market to begin pricing in future rate hike risks; third, equity markets weakened under the dual pressure of geopolitics and rates, with the equal-weighted S&P 500 and small caps underperforming large-cap technology stocks; fourth, the U.K. local election results could affect the gilt market through fiscal rules and gilt issuance expectations.

Analysis framework

The report uses a macro event-driven and cross-asset market observation framework, combining geopolitical news, energy prices, economic data, central bank speeches, interest-rate futures pricing, sovereign bond yields, equity indices, credit indicators, and FX and commodity prices to assess changes in short-term risk appetite and policy expectations.

Methodology notes

• Macro StrategyEvent-Driven Cross-Asset Analysis

  Explains synchronized moves across equities, bonds, commodities, foreign exchange, and credit markets through geopolitics, economic data, and central bank communication.

  The report links the U.S.-Iran situation, rising oil prices, U.S. inflation expectations, employment data, and speeches by Fed officials to explain the equity market pullback, the rise in Treasury yields, and the repricing of rate hike probabilities.

• Market MonitoringIntraday Key Data and Event Calendar

  Tracks macroeconomic data releases, central bank speeches, and political events due on the day.

  The report lists the U.S. employment report, University of Michigan consumer sentiment, German industrial production, and speeches by central bank officials such as Lagarde, Waller, and Bailey as key observations for subsequent market pricing.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Global Equities

  Affected by risk appetite and rate expectations

  Strengths

  The Mag 7 still rose 0.71% and reached a new high, supporting part of the U.S. equity market.

  Weaknesses

  The S&P 500, equal-weighted S&P 500, Russell 2000, STOXX 600, DAX, CAC 40, and FTSE 100 all pulled back.

  Comparison

  Large-cap technology stocks significantly outperformed equal-weighted indices and small caps, while European equities generally fell more than U.S. large caps.

  Risks

  An escalation in geopolitical conflict, higher oil prices, more hawkish rate expectations, and upside surprises in economic data may continue to pressure valuations.

• Crude Oil

  A direct transmission asset for geopolitical risk

  Strengths

  Supply risks and concerns related to the Strait of Hormuz supported Brent back to around $101 per barrel.

  Weaknesses

  If the ceasefire is confirmed effective or the conflict de-escalates, the oil risk premium may decline.

  Comparison

  Brent had fallen to about $100.06/bbl the previous day, with an intraday low around $96/bbl, but later rebounded; WTI was at $96.13, up 0.77%.

  Risks

  U.S.-Iran conflict, the risk of a Hormuz blockade, and energy shocks may amplify inflation and policy uncertainty.

• U.S. Treasuries

  Driven by inflation expectations, labor data, and Fed communication

  Strengths

  Still retain portfolio hedging characteristics as a macro safe-haven asset.

  Weaknesses

  Hawkish data and officials' remarks pushed yields higher, putting pressure on fixed-income prices.

  Comparison

  The 2-year yield rose to 3.91% and the 10-year yield rose to 4.39%, reflecting an upward shift in the entire curve.

  Risks

  If energy shocks intensify or employment/inflation continue to exceed expectations, the market may further reduce rate-cut expectations or even price in rate hikes.

• European Sovereign Bonds

  Affected by oil prices, ECB expectations, and local political and fiscal risks

  Strengths

  The 10-year Bund yield remained relatively stable at around 3.00%.

  Weaknesses

  The early bond rebound faded as oil prices moved back up; the gilt market also faces uncertainty related to U.K. politics and fiscal rules.

  Comparison

  The 10-year gilt rose 0.9bp, OAT rose 0.4bp, and BTP fell 0.6bp; the market is pricing about an 80% probability of an ECB rate hike in June.

  Risks

  Oil prices, inflation, ECB communication, and changes in U.K. fiscal issuance expectations may trigger yield volatility.

Key data

• Brent Oil101.60 / -0.15%; the report states about $101.64/bbl this morning, up 1.58%Oil prices were affected by uncertainty around the U.S.-Iran ceasefire and reports of explosions in Iran, and at one point fell below $100/bbl intraday.
• S&P 5007337 / -0.38%Pulled back from record highs under the impact of geopolitical risk and hawkish U.S. data.
• STOXX Europe 600616 / -1.10%Recorded its biggest decline in more than a month.
• 10yr Treasury4.39% / +4 bpU.S. rate expectations turned more hawkish, pushing both 2-year and 10-year yields higher.
• 美国1年期通胀预期3.64%The NY Fed survey showed a reading above the market expectation of 3.5%, the highest since September 2023.
• 美国初请失业金200kBelow the 205k expectation, with the 4-week average falling to a two-year low of 203.25k.
• 市场定价的2027年3月前加息概率38%Versus 21% the previous day, indicating investors are repricing a more hawkish path.
• 美国4月非农就业预测DB: 50k; previous 178k; consensus 65kThe report lists this as a key event for the day.
• 美国失业率预测4.3%DB, previous, and consensus are all 4.3%.
• Consumer SentimentDB: 52.2; previous 47.6; consensus 49.5The preliminary University of Michigan reading is one of the day's focus data points.

Impact & implications

The report suggests that the market's short-term main theme is shifting from pure risk appetite to the interaction among geopolitical conflict, energy prices, and the central bank reaction function. If oil prices continue to be pushed higher by the Middle East situation, inflation pressure and rising-rate risks may persist, thereby weighing on equity valuations, pushing yields higher, and increasing pressure on credit spreads; if the ceasefire stabilizes and data weakens, the market's repricing of a hawkish Fed path may ease.

Risks

• Failure of the U.S.-Iran ceasefire or escalation of the conflict, especially risks related to the Strait of Hormuz.
• Higher oil prices could bring a new inflation shock and force central banks to maintain or resume a more hawkish stance.
• U.S. employment and inflation data could continue to surprise to the upside, leading to further downward revisions in rate-cut expectations or a rise in hike probabilities.
• Equity markets are becoming more sensitive to high rates and geopolitical uncertainty, with equal-weighted indices, small caps, and European markets potentially more vulnerable.
• U.K. political uncertainty may affect expectations for fiscal rules, gilt issuance, and the U.K. government bond market.
• Trade policy and tariff uncertainty, including U.S. court rulings on the 10% global tariff and the U.S. setting a negotiation deadline for the EU.

What to watch

• The U.S. April employment report, especially nonfarm payrolls, the unemployment rate, and average hourly earnings.
• The preliminary May University of Michigan consumer sentiment index.
• Germany's March industrial production data.
• Speeches by ECB President Lagarde, de Guindos, Nagel, and Fed officials including Cook, Waller, Bowman, Daly, and Goolsbee.
• Speeches by BoE Governor Bailey and BoE Deputy Governor Breeden.
• Progress on the U.S.-Iran ceasefire, the security situation in the Strait of Hormuz, and Brent/WTI oil price moves.
• Statements by the Labour Party, PM Keir Starmer, and on fiscal rules following the U.K. local elections.
• Progress in U.S.-EU trade negotiations and tariff deadlines.