Another day dominated by news from the Middle East
Hopes for peace in the Iran war were the theme once again yesterday, with very positive news that a peace deal was close seeing oil prices fall further, with the dollar ticking down. However, news late in the day that Iran had allegedly shot down a US helicopter, followed by an exchange of attacks between the US and Iran overnight, saw some of those moves reversed. Brent got down to as low as $90/barrel yesterday, matching a level only hit once since April. Prices edged up a little later on but closed at about $91.50, down over 2% for the day. Brent prices rose a touch overnight but are back to around $91.50 right now on hopes these attacks are limited and peace talks will get back on track. The euro gained ground over the course of the day, rising back above $1.1570 to the dollar before easing back later on to around $1.1550 now. Sterling also rose back to above $1.34 before again dipping back to $1.3380. The euro lost a very small amount of ground to sterling, to 86.3p, a marginal move.
Yields ticked down across the curve. US 10-year yields were down 4bps but remain above 4.5%, while 10-year UK yields were also down 4bps to 4.9%. Ten-year bund yields were down 2bps to 3.04%, with bonds rallying as oil prices fell back. There was a renewed fall in equities on the back of weakness in tech stocks, particularly in the semiconductor sector. Tech stocks had fallen into the end of last week but rebounded on Monday. However, that move proved to be short-lived, with another dip yesterday. The S&P fell 0.3% and the Nasdaq lost 1%.
The US NFIB small business optimism index fell to 95.3 in May, from 95.9 in April and below the consensus expectation of 96. This is the lowest reading since October 2024, with the index erasing almost all of the gains seen since the election of President Trump, which was initially favoured by pro-business groups. Primary concerns driving the drop were rising prices and economic uncertainty. Business owners are struggling with costs, with the net percentage of respondents planning to raise prices up 6 percentage points to 36%, with small businesses particularly concerned about volatile energy costs and planning to pass this onto consumers. Employment plans also deteriorated steeply, with only a net reading of 9% planning to hire, the weakest reading in six years. Investment intentions also fell, showing signs of almost a freeze in small business investment. The uncertainty index, at 91, remains well above its long-term average, with 70% of owners pointing to some sort of supply chain disruption, very likely impacted by the Iran war as well as shifting tariff policies.
On the agenda today, the key data will be US inflation, where headline CPI is expected to pick up to 4.2% in May (from 3.8% in April), while core is expected to tick up to 2.9% from 2.8%. Should the print surprise to the upside, combined with last week’s strong payrolls data, this could cause markets to further bring forward expectations of the Fed hiking rates.