March Starts With Geopolitical Turmoil (2-6 March)

Global markets began the week in a state of high alert following coordinated US and Israeli strikes on Iran over the weekend, which resulted in the death of Supreme Leader Ayatollah Ali Khamenei.

The escalation triggered an immediate flight to safety, pushing the Dollar Index to a five-week peak of 98 and gold to a one-month high above $5,370/oz. The effective closure of the Strait of Hormuz, a critical artery for 20% of global oil and gas flows, caused Brent crude to surge more than 8% to an eight-month high.

Amidst the geopolitical turmoil, US economic data continues to show a "higher-for-longer" resilience. The ISM Manufacturing PMI unexpectedly jumped to 52.6, marking its first expansion in a year. While producer prices rose more than forecast, the massive bid for safe-haven bonds pushed the 10-year Treasury yield to its lowest level since September 2024.

Market Drivers & Catalysts

• Middle East Escalation: US/Israeli strikes on Iran and subsequent retaliatory strikes on US assets across eight neighboring nations have severely disrupted maritime traffic in the Gulf.
• Energy Supply Shock: The closure of the Strait of Hormuz prompted shipping companies to reroute vessels, offsetting a modest OPEC+ production increase of 206,000 bpd for April.
• UK Political Uncertainty: Labour’s third-place finish in the Gorton and Denton by-election has raised doubts over the current administration, sending gilt yields to late-2024 lows.
• Manufacturing Rebound: The US ISM Manufacturing PMI hit its strongest reading since 2022, potentially driven by seasonal reorders and advance buying ahead of new tariffs.
• Diverging Inflation Narratives: While German inflation eased to 2.0%, Spanish and French HICP figures exceeded forecasts, keeping the ECB on a cautious path.

Fixed Income

• US 10 Year Treasury Note Yield: Fell to 3.93%, the lowest in 18 months. Despite a 0.5% monthly rise in producer prices, the demand for safe-haven protection amid the Iran conflict outweighed inflation concerns.
• UK 10 Year Bond Yield: Declined to 4.25%. Political instability following the recent by-election loss and a drop in the GfK Consumer Confidence Index have increased expectations for BoE rate cuts.
• Japan 10 Year Government Bond Yield: Fell below 2.1%, reaching a seven-week low. Safe-haven flows and the addition of two reflationist academics to the BOJ board have kept investors focused on Governor Ueda's upcoming March/April meetings.
• Germany 10-Year Bond Yield: Dropped to 2.68%. EU-harmonized inflation hit 2.0% in February, with France's HICP rising to 1.1% and Spain's to 2.5%, both above forecasts. Markets currently see only a 30% probability of an ECB rate cut by December, as President Lagarde projects food inflation to remain slightly above target.

Commodities

Gold climbed more than 1% to over $5,370/oz. Following its seventh straight monthly gain, the longest streak since 1973, bullion is benefiting from aggressive central bank purchases and a rapid exit from currencies.

Silver rose nearly 2% to over $95/oz, a one-month high. Safe-haven demand intensified following Iran’s rejection of Washington’s nuclear program demands and the subsequent military response.

Currencies

• U.S. Dollar Index (DXY): Rose 0.5% to 98. The dollar’s status as a primary safe-haven was reinforced by the escalation in the Middle East and resilient U.S. manufacturing data.
• Euro: Slipped to $1.18. While the pair is up 12.39% annually, it faced monthly pressure as markets reassessed the ECB’s reluctance to cut rates relative to the shifting geopolitical landscape.
• British Pound: Declined to 1.3442. Sterling fell below the $1.35 threshold as rising unemployment and political setbacks for PM Keir Starmer dampened investor sentiment.
• Japanese Yen: The USD/JPY approached 157.00 before stalling. Intervention fears remain high, though the yen found some underlying support from the broader flight to safety.

Economic Data Highlights

• US ISM Manufacturing PMI (Jan): Unexpectedly rose to 52.6 (vs. 48.5 forecast). New orders hit 57.1 and production reached 55.9, marking a significant turnaround from December's 47.9.
• US Producer Price Inflation (Jan): Rose 0.5% MoM, exceeding the 0.3% forecast. Service prices surged 0.8%, while core PPI jumped 3.6% annually.
• US Initial Jobless Claims: Rose slightly to 212,000, remaining well below the two-year average. Continuing claims fell to 1,833,000, indicating a very stable labor market.
• US MBA 30-Yr Mortgage Rate: Fell to 6.09%, the lowest since early September 2022. While refinancing rose 4.1%, purchase applications declined 4.7% due to economic uncertainty.
• German CPI (Feb): EU-harmonized inflation eased to 2.0%, reaching the ECB's target, while core pressures elsewhere in the Eurozone remain sticky.

Macro Calendar Highlights

• US Non-Farm Payrolls (February)
• Bank of Japan Policy Rate Decision
• Eurozone Retail Sales Data
• OPEC+ Production Strategy Review
• US JOLTS Job Openings Report