Relief rally

There is relief in markets this morning after Donald Trump suspended US attacks on Iran. The two sides have agreed a 2-week ceasefire, which will allow for the Strait of Hormuz to re-open in the intervening period. Oil prices have fallen sharply – Brent crude is down around $15 from yesterday’s close to just under $95 p/b – and equities and bonds are rallying strongly, while the dollar is a good deal lower. Having gained some ground against the US currency during yesterday’s session, the euro and sterling are up a further cent or so this morning, trading at around $1.17 and $1.34 respectively. EURGBP is not much changed as it continues to hover above £0.87.

Government bond yields have fallen sharply at the open as markets pare back expectations for central bank rate hikes. German 2- and 10-year yields are about 20bps and 15bps lower respectively, while equivalent UK yields are down around 25bps and 20bps. In equity markets, Asian stocks posted strong gains overnight (Japan’s Nikkei index added more than 5%), while European stocks are up around 4% at the started of play today.

Fed Vice-Chair Jefferson says “uncertainty about the economy is elevated, and the rise in energy prices and the conflict in the Middle East add to that uncertainty,” while he continues “to see the current (monetary) policy stance as appropriately positioned to allow us to assess how the economy evolves.”

ECB member Wunsch says he  doesn’t want to “exclude a rate hike” at this month’s monetary policy meeting. He notes that “either this crisis ends quite soon and you know if we hike (in April) then we can probably undo that after a while. Or, this crisis is going to last and then the first hike will only be the first hike of probably a series” of rate increases.

For the day ahead, as markets continue to react to the US-Iran ceasefire, economic data due include retail sales and producer prices (both for February) in the Euro area and the construction PMI (March) in the UK, while the Fed publishes the minutes of last month’s interest rate meeting.