JPMorgan: Geopolitics Back in Charge, but Markets Still Lean on De-Escalation - FJElite

Geopolitics drove markets yesterday, with the escalation trade returning as oil moved back toward $80, euro area and UK rates underperformed, and broader risk sentiment weakened. Even so, the bigger view still seems to be that neither side has a strong incentive to restart a full kinetic escalation. That helps explain why, despite overnight attacks, markets are bouncing this morning, with Europe outperforming and some of the move looking like another expression of the “TACO” mindset.

That shift also shaped equity leadership. Tech regained leadership as momentum shorts tied to macro and consumer exposure underperformed, while the broader broadening trade stalled again. In rates, markets quickly repriced a more hawkish path in Europe and the UK, with the UK 2-year move the biggest since March, while ECB communication reinforced the sense that the Iran shock has complicated the path toward the ECB’s milder scenario. The broader message is that a full resumption of the US-Iran conflict would likely hit Europe hardest, given the region had been seen as one of the main beneficiaries of de-escalation. At the same time, renewed Middle East tension is again putting the focus on oil infrastructure, security, resilience spending, and pipeline-related themes across MENA.