- Major US stock indices post new all-time highs, but is this rally masking deeper concerns?
- Progress is made in US-Iran negotiations as oil stabilizes above $90
- Dollar weakness pauses, gold fails to decisively rally, and the Dow Jones 30 index lags
- Numerous central bank speakers today, as Fed-ECB policy divergence persists
US stocks send an “everything is awesome” message
Following an impressive series of positive sessions, and with just one red session since the March 31 low, both the S&P 500 and Nasdaq 100 indices reached new all-time highs in yesterday’s session. The decent start to the current earnings season and upbeat AI headlines contributed to this new record high, although investors are mostly interested in what these moves imply for the US-Iran negotiations.
The newsflow regarding the open regional conflicts in the aforementioned area is mostly positive. The direct Israel-Lebanon discussions continue, with President Trump adopting his usual cheerful tone, while indirect talks between the US and Iran are in full swing ahead of the next face-to-face meetings in Pakistan.
Notably, there seems to be progress on most fronts, with Iran apparently proposing a partial Hormuz reopening for ships via Omani waters, mostly as a gesture of goodwill, but also showing concern about the impact of the US closure. The two-week ceasefire expires next week, and despite Iran denying an extension, such a move could be agreed, if needed, to offer ample time for a comprehensive agreement.
Taken together, one could infer that the two major US stock indices imply a swift resolution to the Middle East crisis, with a subsequent return to a normalized oil supply through the Strait of Hormuz, and a brighter economic outlook, despite the damage done to consumer appetite as seen in both recent US surveys and the March Chinese retail sales data.
Middle East talks could take a turn for the worse
However, this assessment could prove premature, with the outlook being less bright than currently portrayed by the two major US equity indices. Specifically, the situation in the Middle East remains unclear. The Iranian nuclear program remains the main obstacle to an agreement, and could easily derail the progress made so far, resulting in an acute risk-off episode and a restart of hostilities.
Additionally, the US equity performance could be mostly a product of investors running ahead of themselves, or even likely positioning for the next significant upleg, rather than pure optimism about the short-term outlook.
And more importantly, other assets are experiencing less impressive moves compared to the record highs posted by the S&P 500 and the Nasdaq 100 indices. Oil has stabilized above the $90 level, the US dollar weakness has paused, with euro/dollar hovering around the 1.1800 region, while gold, which during this crisis has been matching the behaviour of risk assets, is struggling to decisively climb above the key $4,800 area. Most notably though, the Dow Jones 30 index, which is dominated by traditional economic sectors such as industrial stocks, is still 4% below its all-time high and has yet to recoup its losses since the February 27 close.
Central bank actions in focus
Monetary policy remains in the spotlight, as the divergence between the Fed, the ECB and the BoE persists. The Warsh effect is keeping rate cut expectations alive, with markets pricing in 11bps of Fed easing this year as the countdown to the much-talked-about Senate testimony of the Fed Chair nominee is apparently nearly over. Interestingly, FOMC members Williams and Miran will be on the wires today, with investors most likely paying more attention to the New York Fed President’s remarks.
Meanwhile, markets are pricing in 50bps and 35bps of tightening from the ECB and the BoE, respectively. Despite the inflation surge, most ECB members are not on board with an April rate hike, preferring to postpone decisions to June. Next week’s PMI surveys are key, with today’s calendar also being rather full of ECB speakers.
Similarly, the strong UK GDP and production data for February have been welcomed by the market, with the pound gaining a few pips, but next week’s data calendar, which includes CPI and labour market data, could pave the way for a rate hike later this month. Notably BoE’s Taylor is set to speak later today, and he is unlikely to support these hawkish expectations.