- Slow progress in US-Iran talks keeps oil prices elevated, unaffected by UAE’s OPEC exit
- Fed meeting in focus, but all eyes are on key earnings announcements
- Expectations for stellar results could trigger a sharp sell-off upon disappointment
- BoC to remain in waiting mode; muted loonie reaction expected ahead of US events
Still no light at the end of the tunnel
Investors are anxiously awaiting news on the US-Iran indirect talks following the apparent rejection of the three-part plan prepared by the Iranian side. There are reports that a revised plan will be submitted soon, hoping that it will gain traction within the US administration, particularly with Vice President Vance. He seems to be more open to a resolution than a continuation of the current stalemate, in stark contrast to President Trump.
According to numerous reports, Trump is preparing for the ‘long game’, an indefinite closure of the Strait of Hormuz to choke the Iranian economy, forcing them to accept his terms, in particular the moratorium on enriching uranium for non-civil reasons.
However, the continuation of the current status quo, apart from its impact on Iran, is potentially going to choke the global economy. Trump hopes that US troubles will be limited, partly due to its self-sufficiency in oil and gas production and the arrival of Kevin Warsh at the helm of the Fed. Certain Republicans, though, are less excited with the prospects of a continued oil price rally in light of the November midterm election that could really dent Trump’s ability to govern.
With the June WTI oil future trading persistently around $100, the UAE’s decision to exit OPEC and OPEC+ has added another layer of complexity. While the Middle Eastern country has been long complaining about production quotas and Saudi Arabia’s hegemony, such a move would most likely not have taken place in the absence of the US-Iran conflict.
From a long-term perspective, the move might actually prove beneficial for the main oil importing countries, as the UAE can now act independently, unbound by OPEC rules, and sign long-term deals. However, an attempt to take market share away from Saudi Arabia could result in another price war, pushing oil prices much lower and denting the UAE’s ability to recover from the current havoc. Interestingly, Kazakhstan and Iraq are rumoured to also be at the departure door, awaiting SA’s response to the UAE announcement before they make the final step.
Fed meeting in focus
Following the hawkish BoJ hold, which did not support the yen much, the focus shifts to the Fed meeting. No rate change is expected, with the market pricing in a 25% probability of a rate cut by year-end. Given the lack of the usual dot plot and new economic projections, and the fact that it will most likely be Powell’s last meeting as Chairman, no major surprises are expected.
The overall rhetoric and the Q&A session at the press conference, along with the number of members voting for a rate cut, are pivotal in gauging the sentiment within the committee, although everything can change when Warsh takes office. Barring a major surprise, the impact on the dollar will probably be minimal, with investor attention turning to the critical earnings announcements.
With US equity indices rallying despite the mixed newsflow regarding the Middle East conflict, today’s earnings calendar could further boost current momentum. Alphabet, Microsoft, Amazon and Meta will announce their results after US markets close, with the focus being on AI investment, profitability and cloud growth. Most analysts expect stellar reports, raising the probability of a harsh market reaction if investors feel a sense of disappointment, particularly due to increased costs.
BoC to stand pat
A few hours earlier, the Bank of Canada is expected to keep rates stable. While Governor Macklem and his colleagues might deem that growth concerns – partly due to tariff threats from the US – outweigh inflationary pressures and the possibility of second-round effects – as detailed in today’s revised quarterly projections – they will probably remain in a wait-and-see mode.
Notably, contrary to the BoJ, the loonie has been faring much better and is currently posting its fourth consecutive week of gains against the US dollar. A balanced BoC message today might disappoint loonie bulls, but they probably will not be too upset, provided that a possible upward move in dollar/loonie stops short of the 1.3728 region.