Hooray for MOU day!

The persistence of sticking points in the US-Iran diplomatic process (and the absence of an official peace document) didn’t deter investors from bidding up equities on Monday.

With oil in retreat on the prospects for a deal to end the conflict, risk was buoyant in Asia, where the Nikkei topped 65,000 and also in Europe, where the Stoxx 600’s nearly erased its war losses.

As the simple figure shows, the European benchmark — which posted gains in eight of the last nine sessions and came into Monday having advanced in eight of the last nine weeks — was within 50bps of its February 27 record.

That’s notable, and not just because it’s a holiday on Wall Street, leaving market commentators to begrudgingly address unexciting European equities.

Compared to the Fed, the ECB (and the BoE) are under a lot more pressure to hike rates in the face of war-driven inflation. They have single-mandates and their economies are more vulnerable to energy supply shocks.

The figure below gives you a sense of what the war’s done to market expectations for the ECB trajectory.

Colloquially, we’ve gone from “probably on hold this year” the day before Ali Khamenei was assassinated to “well damn, probably three hikes” on the eve of the June ECB meeting. (That’s using legacy futures where the market’s more liquid. If you use the new standard for euro STIRs, it’s more like two hikes with better-than-even odds of a third.)

That European equities have clawed back nearly the entirety of their losses in the face of that demonstrably hawkish shift is pretty remarkable.

Christine Lagarde on Sunday said the ECB’s quite likely to revise its inflation outlook at next month’s meeting in light of the “evolving” geopolitical situation, and Martin Kocher (Austria’s central bank chief) said a hike’s on the table in June “if the situation doesn’t improve.”

Such are the stakes for European monetary policy this week as Donald Trump and Tehran attempt to close “gaps” on the way to delivering the MOU Trump teased over the weekend.

On Monday, a spokesman for Iran’s foreign ministry said it’s “true we have reached a consensus on most issues, but no one can claim that the signing of an agreement is imminent.”

For his part, Trump said the burgeoning arrangement “will either be a great and meaningful one, or there will be no deal.”