- No light at the end of the Middle East talks tunnel; oil prices remain dangerously high
- US equity markets are shielded by Nvidia earnings expectations, ignoring elevated yields
- Disappointment from Nvidia results and FOMC minutes could trigger a broader correction
- Dollar/yen rally pauses, pound retains yesterday’s gains
Never-ending story
Sometimes, it feels like we are stuck in a time loop regarding the Middle East conflict. Every week brings another effort to reach a deal, with another proposal sent by the Iranians and rejected by the US, followed by renewed military threats from President Trump against Iran. In the end, little progress has been achieved, and we are back to square one.
Similarly, at the moment, there appears to be another effort from Israel, Saudi Arabia and other countries in the region to facilitate an agreement between the US and Iran, with US Vice President Vance actually stating that “lots of progress has been made”. However, this development is not confirmed yet, keeping another round of US attacks on Iranian soil on the table.
Oil price and bond yields keep central banks on edge
While politicians fail to solve the problems they themselves created, market participants are losing their patience. Spot oil prices remain firmly above $100, with the December WTI oil future still hovering around $85, confirming concerns for a very gradual relaxation in oil prices, while sovereign bonds maintain their recent yield gains.
The continuation of these moves will eventually force central banks to join the RBA into hiking rates soon. While the ECB is much more accustomed to ignoring growth concerns and just focus on price stability – with the June rate hike being the central scenario at the moment – the same cannot be said for both the Fed and the BoE.
While the public debate between Fed members continues – oddly enough the hawks have been relatively muted in their commentary, potentially wanting to allow for a smooth welcome to newcomer Chair Warsh – the FOMC minutes from the April meeting will be released today. Should these minutes show strong support for a tighter policy stance ahead, markets could react by boosting the chances of a rate hike priced in during 2026, thus keeping the dollar in demand. But Warsh’s first speech will be the decisive factor, as his monetary policy views are still a black box.
Gold struggles persist; equities prepare for Nvidia earnings
Both gold and risk assets are showing increased nervousness. The precious metal has dropped below the $4,500 level, which appears to have attracted buying interest in previous sessions. Meanwhile, US equities have only lost a bit of their froth following the recent aggressive rally, as they are still trading near their fresh all-time highs, partly shielded by today’s earnings announcement.
After the US market closes, Nvidia is scheduled to announce its earnings, with very strong expectations of another stellar report and upbeat outlook. This also means that the bar for disappointment is rather low, as any hint of easing demand or lower investment appetite could hit risk appetite considerably, triggering a far more protracted correction in US equity markets.
Dollar on the move; yen and pound follow divergent paths
The lack of progress in the Middle East talks is keeping the US dollar bid, with euro/dollar finally overcoming the support set by the various simple moving averages at the 1.1650-1.1693 region, dropping to its lowest point since early April. At the same time, dollar/yen continues to hover near 159. Investors would like to think that verbal interventions have put a pause to the persistent rally, but it is more likely that yen bears are just evaluating the situation, or they are just trying to guess the timing of the next BoJ intervention.
Finally, in the UK, following the mixed labour market data yesterday, the CPI report confirmed expectations for a weaker report, mostly due to one-off adjustment. Market expectations for rate hikes have somewhat been dented, but BoE’s strategy might ultimately depend on the political developments. Pound/dollar is hovering below 1.3340, but the move is unconvincing.