The TACO-Trade Met It’s Maker

Markets

The TACO-trade met it’s maker. “Iran Never Chickens Out” pushed the US tech-heavy Nasdaq index into correction territory last week, trading around 12.50% off the all-time high reached in January (20948 close vs 24020). From a technical point of view, we rapidly approach 38% retracement on the rally that followed the early Liberation Day mess (20492), the 2024 high (resistance-turned-support) at 20205 and the target of the double top formation that formed during Q4 2025 and Q1 2026 (19776). The S&P 500 is currently 9% below its record (6356 close vs 7002) with more or less similar technical references at 6174 (38% retracement), 6147 (2025 high) and 6102 (target double top). The Eurostoxx 50 trades already 13.3% below the all-time high (5506 close vs 6200) and narrowly closed above 5500 support last week. The next line of defense stands at 5370 which is 50% retracement on the post Liberation Day rally. From a momentum point of view, the pace of the equity sell-off especially started accelerating in the US last week. Weekly differences on bond markets were more limited last week, thanks to a strong rebound of US Treasuries during Friday’s US session. Volatility remains extremely high though. After the initial hawkish front end repositioning, more and more harm is being done at the longer end of the curve as inflation risk premia start drifting away. The dollar stands its ground in FX space. The trade-weighted dollar closed last week above the 100-mark (100.36 March high), EUR/USD ended just above 1.15 (1.1411 March low) and USD/JPY broke the 160-mark for the first time since July 2024, prompting direct verbal intervention treats by Japanese officials.

The first marker on our market-dashboard continues to signal escalation risks and keeps above-mentioned momentum trades going. Brent crude moves above $115/b, approaching the highest level since the start of the war ($119.5). Rumours of a US ground invasion, either seizing the strategic Khargh (oil) island or even trying to extract Iran’s uranium go in the mix with Houthi’s joining Iranian war efforts (first attacks on Israel) and Iranian strikes on aluminum plants in Abu Dhabi and Bahrain. The latter pushed futures on the London Metal Exchange up by the most since 2024 (+4-6%) as they disrupt stretched supply chains even more. Today’s eco calendar contains EC economic confidence indicators and German March inflation numbers. Spanish figures at the end of last week reflected the energy supply shock though rose slightly less than consensus (+1% M/M and 3.3% Y/Y from 2.3% Y/Y; core stable at 2.7% Y/Y). US Fed Chair Powell participates in a moderated discussion at Harvard University, but don’t expect him to elaborate as much as for example the ECB on the Fed’s reaction function. Steady remains the key principle for the Federal Reserve.

News & Views

The European Commission proposed some general principles in trying to coordinate EU countries’ response to the energy price surge. Such coordination is deemed essential to prevent market fragmentation and leverage economies of scale. The EC has also learned from 2022 in that many of the measures back then were broad and untargeted, leading to inefficiencies and a huge fiscal price tag. The EC’s preferred option is to support only the most vulnerable households because that would not distort the price signal too much. EU countries could also lower electricity taxes but the Commission warns for the hole it could punch in budget revenues at a time when deficits and debt are already high. The EC is also suggesting a form of two-tier pricing for electricity and/or natural gas as a way to blunt the impact for vulnerable households and firms. Whatever measure taken, the EC said it should have a clear end-date.

Rating agency Fitch affirmed Israel’s rating steady at A with a negative outlook. The rating itself balances a “diversified, resilient and high value-added economy and strong external finances against a high public debt/GDP ratio, still high security risks, and a record of unstable governments that has hindered policymaking”. The negative outlook is a reflection of a projected continued rise in public debt on deficits nearing 6% of GDP this year, which is already well above the A median, as well as war-related tail risks that may weaken Israel’s growth prospects and its fiscal trajectory. The latter could remain unaddressed due to the fractious domestic political environment. Fitch forecasts debt to rise from 71.4% this year to 72.5% in 2027 with further increases in subsequent years. Growth is projected to pick up from 2.9% last year to 3.5% in 2027 with inflation remaining close to the mid-point of the 1-3% central bank target through 2027.