- Two-week truce is already under threat as Israel continues its operations in Lebanon
- Iran demands payment to open the Strait of Hormuz; Trump threatens new attacks
- Risk-on sentiment evaporates; oil remains near $100 and gold fails to climb to $4,900
- Key US data ahead, with March CPI being the highlight tomorrow
Ceasefire is already under threat
Following the announcement of the two-week ceasefire between US and Iran, markets reacted in a risk-on fashion. Equities jumped and gold rallied, while the US dollar, yields and oil dropped aggressively, surrendering a chunk of their gains since the start of the Middle East conflict.
However, the euphoria did not last. As noted yesterday, Israel is not satisfied with the ceasefire, but it does allow it to focus on neighbouring Lebanon and patch up its Iron Dome protection after 40 days of repeated attacks from Iran and its proxies. Therefore, it continues its operations in Lebanon, with a massive attack held yesterday just a few hours after the agreement.
At the same time, the US demanded the swift reopening of the Strait of Hormuz and despite Iran publishing a map avoiding the scattered mines, very few ships have gone through with their transmitters switched off to avoid detection. Iran is actually demanding tolls from ships deciding to cross the Strait of Hormuz, drawing the ire of the US.
These developments are testing the fragility of the agreement, with US President Trump forced to threaten Iran with a resumption of hostilities. That said, there appears to be an incentive from both sides to maintain the current ceasefire, with the next step being the direct talks in Pakistan.
Markets are in defensive mode
Investors took advantage of yesterday’s improved risk sentiment but remain exceptionally wary of the short-term outlook. Consequently, oil bounced off yesterday’s lows, and it is currently hovering a tad below the $100 level. A sustainable sell-off towards $80 needs an agreement to safely reopen the Strait of Hormuz without tolls or mines but this still feels a long way off though.
This reversal is present in most markets. The US dollar enjoyed a bid in the latter half of yesterday’s session, partly due to investors picking up on the minutes from the March 19 Fed meeting showing some appetite for rate hikes if inflation accelerates, and ignoring that most Fed participants favour rate cuts to support a weakening labour market over inflation.
At the time of writing, euro/dollar is currently trading around the 1.1660 region, having failed to overcome the resistance set by the 50-, 100- and 200-day simple moving averages (SMAs) near the midpoint of the prevailing rectangle.
Similarly, the drop in dollar/yen proved less exciting than anticipated, with the pair remaining above the 158 level. Markets are pricing in only a 53% chance of a BoJ rate hike on April 28 despite satisfactory economic data, recently announced wage increases and the numerous ex-BoJ members advocating in favour of such a move. Hence, intervention remains the number one option for Japanese officials.
Interestingly, gold failed in its third attempt to break above its 50-day SMA, fully erasing yesterday’s gains and remaining stuck in a tight range. The 100-day SMA acts as a floor for now, but further positive news from the Middle East is needed to push gold towards the $4,880 area and gradually challenge the price decline since mid-March.
Key data and a 30-year US auction coming up
Headline risk remains extremely elevated and understandably the main driver of market movements. That said, there are some key data releases coming up. While today’s final print of US Q4 GDP and February’s PCE report will feel backward-looking, the same cannot be said for tomorrow’s calendar.
Chinese CPI and PPI data for March, and more importantly, the March US CPI report and the University of Michigan Consumer Sentiment survey will offer valuable insight into the impact of the Middle East conflict on inflation and consumer appetite.
Finally, following yesterday’s unimpressive and uninspiring 10-year US Treasury auction, $22bn of the 30-year benchmark will be offered today, properly testing investor appetite for long-term US debt.