Oil and dollar rally somewhat following US strikes on Iran
The euro was trading above $1.15 for much of Friday, on news – at that time – that the US might be delaying any direct attack on Iran. However, that proved to be a false flag as the US did strike at nuclear sites in Iran over the weekend. That saw the dollar open this week higher, back to under $1.15 to the euro in early overnight trading. However, the dollar is not making sizable gains as the market is waiting to see what comes next if the US stops at this or what Iran’s response might be. The dollar is back to just around that $1.15 level this morning and just under $1.3450 to sterling. Similarly oil prices are higher following the strikes but gains are limited for now as markets wait for what Iran may do and how that may impact real world oil production and trade.
US yields were a little lower on Friday. US 10-year government bond yields fell just a couple of basis points on Friday so despite all the turmoil over the past week, 10-year yields were little changed over the week remaining at around 4.4%. The Federal Reserve FOMC meeting last week contained little in the way of surprise with rates kept on hold and Chairman Powell indicating that they were in a good position to stay in a ‘wait and see’ mode for now. In equities markets, it was volatile day to day last week but for the week as a whole there was actually little change for the S&P 500 with the index closing on Friday broadly unchanged from the previous Friday close. The Eurostoxx also had a volatile week but closed with only a modest 1% fall for the week. The expansion of the war in the Middle East is negative for sentiment and equities are likely to open lower in trading today.
Oil prices higher. Unsurprisingly, oil prices have been shifting higher over all of last week over fears that further conflict will hamper oil supply and trade in the Middle East. A barrel of brent crude was trading at around $77/barrel on Friday, up about $10 from where it was two weeks ago. News of the US strikes over the weekend has sent oil prices higher again, but only modestly with prices up about 1-2% from Friday’s close. Traders are in a patient mode to see what the next move is from Iran and what form, if any, it’s retaliation against the US will take and if it can seriously threaten the oil trade.
Philly Fed Index in June shows manufacturers continue to struggle. The index came in at -4.0 in June, unchanged from May. That indicates that manufacturing activity in the Philadelphia region continues to contract, albeit fairly modestly. Current activity indicators such as new orders and shipments are expanding slightly but there was a deterioration in the outlook for business conditions while employment indicators fell. This adds to very mixed survey data from the US lately which indicates that businesses are probably growing a little at the moment, but are concerned about the future with the impact of changes in trade policy and tariffs yet to impact substantially but firms fear that it’s only a matter of time before they negatively shock.
Looking to the week ahead, early June PMI’s in the major economies are due and PCE inflation in the US. There is a large number of central bank speakers on the slate, including Fed Chair Powell’s semi-annual testimony to House Financial Services Committee.