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Good morning. Tensions between the U.S. and Iran remain high, Spain still looks set for a new government and Europe’s bond market will get going again. Here’s what’s moving markets.

The Fallout

The reverberations from the U.S. airstrike that killed a powerful Iranian general continued throughout the weekend. Iran’s defense minister warned of consequences for all those siding with the U.S. and Iran has said it’s not bound by its nuclear deal. U.S. President Donald Trump said the U.S. has 52 targets in Iran and said he was prepared to hit Iran in a “disproportionate manner” should any U.S. targets be hit. All of which leaves politicians across Europe scrambling to figure out what they can now do that the nuclear deal lays in tatters. Expect much, much more to come.

Bumpy Outlook

The main focus for markets following the airstrike has been oil and it could be that crude is in for a very bumpy ride in coming weeks as the U.S. warned that Iran may retaliate with another attack on Saudi Arabia, a move that rocked oil markets back in September. Stocks in the Middle East were savaged on Sunday, following a beating for Tehran stocks on Saturday, as traders reckoned with an outlook for heightened geopolitical tensions in the region and as the predictions for a brighter 2020 for emerging markets were left in tatters less than a week into a new year.

European Politics

Spain's Pedro Sanchez didn’t quite get enough to votes to win the first parliamentary vote on forming a government but remains on track to get over the line in the second vote due on Tuesday, ending a long period of political stagnation for the country. In the U.K., two more prominent candidates through their hats in the ring for the Labour Party leadership, Jess Phillips and Keir Starmer, with a few more still likely to emerge before the timetable for the race is set out this week. Also worth keeping an eye on a growing budget battle in Portugal and the ousting of Croatia’s president.

Bonds Return

European bond sales will get back to business in this first full week of the new year against a backdrop of the U.S.-Iran tensions which may help to keep the asset class popular as a haven play. Investors will also be eyeing the words of two former central bank presidents — Mario Draghi and Janet Yellen — who said Sunday central banks alone don’t have the tools to cope with the daunting economic challenges both Europe and the U.S. face. And they’ll have to take into account three other senior central bankers who said that low rates could get even lower.

Coming Up…

Stocks slid in Asia and European futures are pointing to a down day, too, as the tensions surrounding the U.S. and Iran continue to hit sentiment. Gold and the Japanese yen are both higher as investors flee to safe havens and oil is still rising amid  concerns about potential supply disruption. It is relatively quiet on the earnings front in Europe, but we’ll get services and composite PMIs from across the continent to keep things busy on the macro front.

What We’ve Been Reading

This is what’s caught our eye over the past 24 hours. 

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