- Middle East negotiations continue to dominate market sentiment
- Elevated oil prices and Treasury yields cast a shadow over equities
- A strong market decline could force Trump’s hand; could Nvidia earnings trigger it?
- Dollar/yen reached ¥159, fresh intervention is imminent; has the BoJ learnt its lesson?
Light at the end of the tunnel for Middle East negotiations?
It has been an eventful start to the week, as the Middle East developments are still dictating market sentiment. More specifically, the back-and-forth regarding a comprehensive agreement between the US and Iran continues, with the Iranians bringing another proposal to the table. Rumours that President Trump is considering lifting some of the oil sanctions helped risk appetite, but the reports later proved inaccurate, reversing the muted risk-on moves.
The disappointment did not last though, as Trump announced that a scheduled attack on Iran was postponed after demands from the leaders of Saudi Arabia, Qatar and the UAE, reinvigorating hopes for a peace deal soon. Unfortunately, this never-ending process is starting to impact equity market sentiment via the bond yield channel, while oil prices are also starting to play their part.
Oil prices remain elevated, boosting inflation across the board, as the July future is trading at $103.35, at the time of writing, and the December WTI oil future is hovering a tad below yesterday’s high of $85.63. As repeatedly stated, an agreement does not mean a swift decline in oil prices, since it will take several months to normalize the oil supply routes, as also recently highlighted by the Aramco CEO.
All eyes remain on bond yields and Nvidia
That said, bond yields appear to be the decisive factor as the 10-year US Treasury yield has climbed above 4.6%. The 10-year US yield is the barometer of the global economy, acting as a basis for debt instruments and determining US mortgage rates and savings rates. In our context, more expensive sovereign and corporate borrowing cannot be taken lightly by the market, especially during the massive AI investment plans and the continued budget deficits run by the Trump administration.
Despite Trump not willing to publicly admit it, a peace agreement with Iran might be the only way to ensure that equity markets continue their trend higher and oil prices fall. This would make Fed Chair Warsh’s life easier, and, above all, boost Republican chances at the November midterm elections. Potentially, only a strong market decline could force his hand. That might happen sooner than most investors expect, as Nvidia reports on Wednesday; the lack of stellar earnings could prove extremely market damaging.
Both the yen and the pound remain in the spotlight
While investors are craving a breakthrough in the Middle East negotiations, the yen remains under severe pressure. As previously noted, the April 30 intervention proved inadequate, with the Japanese authorities potentially hoping that data releases, such as today’s stronger-than-expected Q1 GDP report, more hawkish commentary from BoJ officials and a sizeable drop in the US dollar would allow the yen to substantially recover.
Market participants have been reacting to this ‘passive’ approach like sharks smelling blood, pushing dollar/yen back above ¥159, at the time of writing. Another actual intervention seems inevitable, with Finance Minister Katayama essentially pre-announcing such an action at the G7 finance leaders’ meeting. The US appears to be on board with this move, with Japanese officials promising not to sell their vast US Treasury holdings to fund another intervention.
Meanwhile, the pound is slightly on the back foot today, following a decent recovery recorded in yesterday’s session. Data-wise, the March unemployment rate climbed to 5% and average earnings excluding bonuses continued to ease, although the April claimant count did not fall off a cliff. But pound investors’ main headache is the political situation. While PM Starmer is vying to remain in office, the Labour party is gradually preparing for what comes next, with Andy Burnham potentially in charge. Markets, though, will cast the decisive vote as the 10-year gilt yield remains above 5% and investors prepare for tomorrow’s CPI report.