The S&P 500 saw a reversal of gains from overnight, driven by a hot PPI number that pushed yields higher ahead of the FOMC meeting on Wednesday. However, geopolitical tensions continued to weigh on the market, with Iran vowing to retaliate against recent strikes on senior leadership and a major gas field. As a result, Brent crude prices were just under $110.

Despite the broader risk-off move in the market, defensives underperformed significantly, lagging the S&P 500 by 75 basis points. Within the defensive sector, Staples and Pharma were the primary drivers of weakness, with {UBXXSTAP} and {UBXXPHRM} falling by 1.6% each. As UBS Strategist Andrew Garthwaite noted in his latest note, this underperformance is not new and has been ongoing since the start of the Middle East conflict. However, the gap between defensives and the S&P 500 narrowed significantly when compared to the equal-weight S&P, which suggests that recent strength in AI stocks (less Iran sensitive) may be playing a role in the outperformance.

Gold miners were also under pressure, falling by 5.5% and extending their drawdown to 23% from February highs. This weakness can be attributed to the failure of gold to act as a geopolitical hedge, as well as reduced rate cut expectations over recent weeks.

In terms of cyclical sectors, the basket {UBXXSCYC} was flat today, with Aaron Nordvik highlighting that ahead of the war in Iran, EPS revision breadth for this basket of the most economically sensitive parts of the industrial complex was breaking higher. However, these green shoots may be destined to retrace lower if a pathway to de-escalation and normalization of energy markets does not take shape.