Back from the brink for now

Trump’s about-turn (for now anyway) on his threat to strike Iran’s power plants drew a predictable enough response in markets. Oil and gas prices fell, rate hike expectations were pared back, bond yields eased, stocks rallied, and the dollar gave up some ground. The US currency is trading at about $1.16 and $1.34 vis-a-vis the euro and sterling respectively this morning, well off yesterday morning’s best levels of circa $1.1480 and $1.3260. EURGBP is marginally lower versus Friday’s close, trading just below £0.8650.

The market is back to pricing in a bit less than three quarter-point rate hikes from the ECB and Bank of England this year, though it still sees a good chance (70% or so) that both will raise rates next month, and has also pared back the prospect of any hike from the Fed this year. Bond yields fell as rate expectations were re-priced, with UK 2-year yields falling by around 15bps and equivalent German and UK yields about 10bps and 5bps lower respectively. Stocks rallied from their lows of the day, ending with gains of around 1% to 1.5%. Brent crude is just above $100 a barrel this morning, down from highs yesterday of $114, while European gas prices are down at about EUR 56 per MWh (from highs of over EUR 63).

 Consumer confidence in the Euro area fell in March to its lowest level since October 2023 according to the European Commission’s flash reading. This presumably is in response to the jump in energy prices triggered by the conflict in the Middle East, though the fall in sentiment (4 points) was not as marked as the very sharp decline (12 points) that occurred in March 2022 following Russia’s invasion of Ukraine.

 The main economic data releases today are the flash PMIs for March for the Euro area, UK and US, all of which are expected to show some impact from events in the Middle East. Other data due include the ADP weekly employment report in the US.  There are also a number of ECB members scheduled to speak during the course of the day.