- Reports of fresh US-Iran talks scheduled as the former blocks the Strait of Hormuz
- Both the dollar and major equity indices return to pre-Middle East crisis levels
- Gold’s underperformance persists as investors are not adopting the US-Iran agreement hopes
- Rich Fedspeak, packed earnings releases, and US data in the spotlight today
Rollercoaster ride continues
Unsurprisingly, the first face-to-face meeting held last weekend in Pakistan between Iranian and US officials in decades failed to yield an agreement, though the two-week ceasefire agreed on April 8 is still in place. The main friction point appears to be the Iranian nuclear program, which is the reason that US President Trump greenlit the 45-day-old operation.
As a response, Trump decided to block the Strait of Hormuz for ships originating from or planning to dock at Iranian ports. This move has added another twist to the story so far, with most analysts seeing Trump’s decision as a pure negotiating tactic to force Iran back to the table for further discussions, as its oil revenues will gradually vanish.
At the same time, he aims to get China, which acquires a sizeable chunk of its oil imports from Iran, more involved in the current peace talks. There have been reports of Chinese ships being stopped from exiting the Strait of Hormuz, which could anger China. Intriguingly, Russia’s Putin has already expressed his readiness to help, if needed.
Interestingly, Vice President Vance stated overnight that progress has been made in talks with Iran. Among the Iran hawks, Vance appears to be best positioned to reach such an agreement, acting as a counterweight to Trump’s repeated aggressive stance. There are reports that another round of face-to-face meetings between US and Iranian officials could take place on Thursday, or early next week.
Market whipsawed
Headline risk remains extremely elevated, as speculation about an agreement is followed by reports of a breakdown in direct communications, fueling concerns about another oil price surge, within the same trading session.
Oil prices continue to hover below the $100 level, with the September 28, 2023 high at 95.51 acting as a floor at this stage, as positive news does not necessarily mean an oil price drop as the normalization of oil flows through the Strait of Hormuz could take months. Reports that the IEA could go ahead with further oil reserve releases have helped bearish sentiment, but this remains a drop in the ocean.
Both the dollar and US equities discount an agreement
The current improved risk appetite is evident across the board, with euro/dollar climbing to the highest level since March 2, the first working day after the joint US-Israel operation against Iran commenced, almost fully erasing dollar gains.
Similarly, following Monday’s strong positive session, both the S&P 500 and the Nasdaq 100 indices have recouped their Middle East-induced losses, with only the Dow Jones index trading about 1.3% below its February 27 close.
Put together, there seems to be a strong belief among investors that an agreement might be closer than widely perceived, somewhat surprising given the repeated back-and-forth between the two sides, thus potentially opening the door to significant disappointment if developments over the next few days do not match these expectations.
Meanwhile, gold remains stuck between its 50- and 100-day simple moving averages (SMAs), around 10% below its end-February close, having failed to fully take advantage of the dollar’s recent underperformance. The precious metal, though, appears ready for a breakout. The direction is yet to be determined but concrete positive newsflow from the Middle East could result in a gold rally.
Busy calendar today
Finally, following the unimpressive March US CPI and the disastrous University of Michigan Consumer Sentiment index, focus shifts to the March US PPI, an indicator of future CPI inflation, and numerous Fed speakers. At least five FOMC members will be on the wires today, covering the entire hawkish-dovish spectrum. Meanwhile, the earnings round continues to further US bank results, while the IMF is scheduled to release its World Economic Outlook today, most likely sounding alarmist about global growth amidst the current energy crisis.