Markets see-saw over escalation and de-escalation in the Middle East
Iranian and Israeli missile attacks over the weekend saw oil open higher yesterday morning, with a barrel of Brent crude initially gaining more than 5% to $98/barrel. However, Iran’s announcement that it had ended its military operation, and news from President Trump that both nations were ‘looking to do’ an immediate ceasefire, saw oil prices reverse course, with Brent crude back to $93/barrel this morning, which is in line with Friday’s close. In FX markets, the news of the weekend escalation further strengthened the dollar, which had already moved significantly higher after Friday’s payrolls data shifted US interest rate expectations, and it traded down towards $1.15 to the euro yesterday morning. However, this support level was not breached, and the move reversed over the afternoon, with the single currency getting back to $1.1540 now, though it’s still lower than the $1.16 levels of last week. Against sterling, the dollar is trading at 1.3360, while EUR/GBP is little changed at 86.4p.
Treasury yields also see-sawed during the day but were ultimately only a little changed. US 10-year yields were up 3bps to 4.55% and 2-year yields were up 1bps to 4.16%, though both are up about 10bps since the start of last week on the back of that strong payrolls data. UK 10-year yields were up 4bps to 4.94% and German 10-year yields were up 2bps.
There are very limited, or no, central bank speakers ahead of central bank meetings (ECB, Fed and BoE) in the next week or so, starting with the ECB on Thursday. However, with the market pricing in a rate hike by year-end, President Trump weighed in over the weekend once again, putting pressure on his new Fed Chair Warsh, saying that a rate hike ‘would be the wrong thing to do’ and calling for lower rates. Meanwhile, in the UK, MPC member Alan Taylor told news media that rates ‘don’t need to go higher because they’re quite restrictive at the moment’, but also that cuts should not be considered until the MPC has ‘more clarity’, strongly suggesting he is firmly in the ‘on hold’ camp.
Equities rose again, taking back some of Friday’s losses. Sharp drops in AI-related stocks at the end of last week took indices down, but the same stocks took back some of that lost ground yesterday, allowing the S&P to close up 0.3% for the day, with the tech-heavy NASDAQ up 0.9%. In Europe, the Euro Stoxx and FTSE were more or less unchanged for the day. Equity markets will be closely watching the outcome of the SpaceX IPO this week, which is the first of some major AI-related IPOs that are in the pipeline.
Very little on the data front, just the New York Fed consumer expectations for May, which suggest inflation is anchored, but the outlook is poor among households. One-year-ahead inflation expectations eased to 3.46% from 3.64% in April, while the three-year and five-year expectations were steady at 3.1% and 3.0% respectively. However, the household financial outlook dropped to the weakest since 2022, suggesting real incomes are being squeezed, while the employment outlook hit its lowest reading so far this year, a contrasting signal compared to the strong payrolls number on Friday.
On the agenda today, again little data, with UK retail sales and NFIB small business optimism in the US. Also, there are no central bank speakers, so markets could be moved, by any news from the Middle East.