- The imminent US-Iran deal has boosted risk assets, with oil prices declining aggressively
- Despite the initial reaction, investors remain somewhat cautious as chances of disagreement remain high
- Dollar weakens, but dollar/yen fails to benefit; is another BoJ intervention imminent?
- US markets are closed today; low liquidity could amplify reactions to Middle East newsflow
Risk appetite boosted
Numerous reports and commentary from President Trump, Secretary of State Rubio and Iranian officials pointing to an imminent US-Iran agreement have boosted risk appetite in markets. Most risk assets have gapped higher today, led by US stock indices, following Friday’s decent risk-on session. At the same time, the July WTI oil future has declined to $92, around $14 below last week’s peak of $105.21, while the December WTI oil future is hovering at $78, and US Treasury yields have somewhat eased to their mid-May highs.
Is a US-Iran agreement imminent?
Following intense negotiations, the US and Iran appear to be very close to finalizing an initial agreement. The deal includes: a 60-day extension to the current ceasefire, reopening of the Strait of Hormuz and normalization of navigation within 30 days, and a 60-day timeframe for nuclear negotiations. Crucially, US forces will remain in the region until a final deal is reached, while Iran expects some easing of sanctions allowing it to freely sell oil in markets and a gradual unfreezing of funds, both of which will be tied to its nuclear intentions.
The latter remains the main thorn in the negotiations, as both the US and Israel would love for Iran to surrender its enriched uranium stockpiles, accept US monitoring, and even dismantle its nuclear sites. Financial incentives could go a very long way, but this is a very tough pill to swallow for the fresh Iranian leadership, and it could easily damage the progress made up to now.
Talks continue, with reports pointing to a likely announcement of the deal in the next 48 hours, potentially with a signing ceremony following suit, despite the fact the deal appears to lack crucial implementation details so far. This means that the chances of a disagreement remain high, particularly if Trump continues his triumphant rhetoric about winning another war, partly in response to the Democrats sharply criticizing the alleged current agreement as worse than the famous Obama agreement of 2015. A last-minute breakdown in the US-Iran talks would prove extremely market-moving, with the increased chances of renewed hostilities pushing oil prices back to recent highs.
Dollar weakens, but the yen fails to benefit
Apart from the oil price decline, which could persist if oil ships continue to freely enter and exit Hormuz, the dollar is unsurprisingly on the back foot today. Euro/dollar has gapped higher, rising to 1.1640, at the time of writing, while both the aussie and the kiwi, confirming the risk-on reaction, are the main beneficiaries of today’s action.
Quite notably, dollar/yen is little changed from Friday, with the pair trading just below 159, highlighting the yen’s inability to capitalize on today’s dollar weakness. Considering that the US markets will be closed today, observing Memorial Day, it looks like a golden opportunity for Japanese authorities to intervene, pushing dollar/yen below the 154 area, and easing pressure on the BoJ to go ahead with a series of rate hikes.
At least gold is taking advantage of the dollar’s weakness, with a jump to $4,591, but it looks unable to stage a sustained rally towards the $4,780 area, breaking the current sequence of lower highs and lower lows. Similarly, bitcoin has quickly erased Saturday’s dip to $74.6k, rising to $77.6k, but it appears to lack the momentum to climb to the recent peak of $82k.
Finally, given the quiet data calendar and the lack of Fedspeak, markets will remain driven by US-Iran newsflow. The US bank holiday means that there will be very low liquidity today, thus warranting caution for market participants.