Hopes for Iran peace sends oil prices lower
With the US and Iran holding back on further military strikes, there was a relief rally, sending oil prices and bond yields lower. In FX markets, the euro initially rallied, getting back to above $1.14, but failed to hold onto those gains, with the single currency slipping back over the course of the day to $1.1370, more or less unchanged from Friday’s close. The euro did manage to edge up against sterling, up to 85.5p, its highest level in about 3 weeks. As a result, sterling also lost ground to the dollar and is now down to around $1.33.
Government bond yields moved lower yesterday on hopes for a lasting peace in Iran as President Trump confirmed that peace negotiations are ongoing. Rates had been moving up all of last week as the conflict escalated and markets increased the probability of interest rate hikes. However, the more positive news yesterday saw yields move lower. Ten-year US yields were down 3bps to 4.65%, 10-year German bunds down 4bps to 3.13% and 10-year gilts down 3bps, back to just below 5%. Yields are continuing to shift down another few bps on the open this morning. Equities had more of a mixed day. The more risk-on environment saw a rally at the start of the day, but concerns about the sustainability of AI spending again weighed on investors – for example, yesterday, suggestions that Nvidia and OpenAI are working on interconnected deals increased concerns about the circularity of AI investment – and saw a 5% fall in Nvidia’s share price. Semiconductor stocks fell again, and that outweighed the early rally, with the S&P closing more or less unchanged and the NASDAQ down 0.2%. Similarly, European indices were flat or slightly up for the day.
The bigger moves from the evolving, more positive situation in Iran saw oil and energy prices move sharply lower. Brent crude fell nearly 9% for the day, taking the price of a barrel down to around $88 at the close yesterday, down about $12 since last week’s peak. WTI crude in the US was down about 8% to circa $82. European natural gas prices were also down about 8%. Another night of no attacks from any side has seen prices dip again early this morning with Brent down to $86 now. However, the moves have only taken prices back to levels seen the week before last, and they remain elevated compared to prices at the start of July after the initial ceasefire deal, when Brent traded at close to $70/barrel. Prices have room to sink further from current levels if a lasting peace deal emerges.
There were limited speakers out yesterday, with the FOMC and BoE meetings coming up this week; however, ECB member Kazimir was out and was hawkish, as would be expected, saying the ECB will need to raise rates at least one more time and act before second-round inflation effects emerge. On the data front, the IFO confidence index in Germany was an upside surprise, with the expectations index coming in at 86.7 in July, up from 84.3 in June. That’s the highest reading since February and indicates businesses are more confident about future activity, especially if an Iran peace deal were to come about.
Little data of note is out today, but we do get US Conference Board confidence data.