US-Israeli strikes on Iran have increased geopolitical uncertainty, pointing to higher oil prices and renewed demand for safe‑haven assets. Banks under pressure on private credit concerns. 10Y US treasuries trade towards the low point from October

Financial markets begin the week facing heightened uncertainty following US and Israeli strikes on Iran after the global close on Friday. The scale of the attacks, and Iran’s response, has exceeded expectations, pointing to further demand for safe‑haven assets and upward pressure on oil prices. With President Trump calling for regime change and signalling the risk of a protracted conflict, the range of potential outcomes has widened, and will likely weigh on risk‑sensitive assets.

Oil prices had already moved higher on Friday after the latest round of US–Iran nuclear talks ended without a deal. Brent crude closed more than 2% higher at US$72.50 per barrel. Iranian media reports and naval radio warnings suggesting the Strait of Hormuz is effectively closed saw several tankers turn back, with traffic well below normal levels. Any prolonged disruption through this key transit route would have significant implications for global energy supply and prices.

The recent choppy price action in equities continued into month-end. US equities declined with the S&P closing around 0.5% lower. Concerns about issues in the private-credit market impacted bank stocks, which headed toward their worst day since last April's tariff turmoil. Credit spreads widened after a UK mortgage lender collapsed raising fears that banks could face rising defaults in private lending exposures. Treasuries rallied despite an unexpected pickup in producer prices. G10 currencies were little changed against the US dollar.

US producer prices surprised on the upside in January, with PPI rising 0.5% m/m, the strongest gain since September, as services costs surged. The big increase in the core PPI was driven by trade services likely reflecting companies passing on higher tariff-related costs at the start of the year. According to economists estimates, inputs from the PPI and CPI data imply the core PCE deflator increased by 0.27% in January which would see the annual rate drop to 2.9%, from 3.0% in December.

US treasuries extended the recent rally with 10-year yields dipping below 4.0% for the first time since November and sitting just above the October lows near 3.93%. 2-year yields fell 5bp to 3.38%, the lowest level since 2022. Demand related to month-end rebalancing supported the move, as portfolios incorporated the large quarterly new issues auctioned during the month, which resulted in a 0.1-year index extension for the widely followed Bloomberg index. Yields in European bond markets also declined.

China is moving to lean against recent yuan strength following an almost one‑way appreciation over the past three months. The PBOC will remove the 20% reserve requirement on FX forward contracts from today, lowering the cost of shorting the CNY via derivatives. Officials are not seeking to reverse the move, but are signalling a desire to slow the pace after the yuan pushed to multi‑year highs against the US dollar, reiterating a preference for exchange‑rate stability around equilibrium levels.

The adjustment contributed to a move higher in USD/CNH but had limited spillover to AUD and NZD which are the two G10 currencies that tend to be most sensitive to CNY depreciation. NZD/USD ended the week marginally higher relative to the local close, having briefly traded above 0.6000, amid limited net movement for G10 currencies. The exception was the Swiss franc which outperformed on the back of geopolitical tensions - EUR/CHF traded to its lowest levels since January 2015.

Curve flattening was the dominant theme for NZ rates markets in the local session on Friday. Swap rates were unchanged to 3bp lower across the curve, led by the longer end, which reflected the fall in global yields. This has seen the 2y/10y curve flatten to +98bp, the lowest level in almost 6-months. 2-year swaps closed unchanged at 2.95% while 10-year rates declined 3bp to 3.93%. There were similar moves for government bonds. A rally for Australia bond futures after the local close suggests NZ yields will be biased lower on the open.

Monthly filled job data for January is the only domestic data of note today. Otherwise, it is a quiet calendar aside from the manufacturing ISM in the US. The ISM gauge is expected to show factory activity growing at a slower rate than in January. Regional survey data suggest orders, employment and production activity all softened during the month, while inventory restocking and supply conditions likely supported the index.

Stuart Ritson is a Markets Strategist at BNZ Markets.