Volatile markets
The euro and sterling rose to session highs of around $1.1850 and $1.36 against the dollar on Friday afternoon after Iran announced the temporary re-opening of the Strait of Hormuz. However, Iran’s subsequent abrupt about-turn sees both almost a cent lower this morning, trading at around $1.1760 and a touch above $1.35 respectively, leaving EURGBP largely unchanged at just over £0.87. Oil prices are backing up again, having dropped sharply on Friday, with Brent crude at around $95 per barrel, while European equity markets have opened lower this morning after rallying strongly at the end of last week. There’s also uncertainty over whether the US and Iran will resume talks ahead of the expiry of the 2-week ceasefire this Wednesday.
A rally in government bonds that greeted Iran’s initial announcement on Friday is being (partially) unwound at the start of play today, with German and UK yields about 4-5 higher across the curve. European stocks are off more than 1% at the open, having gained around 2% on Friday, while US indices look set to open lower later today after also rallying by about 2% at the end of last week.
Fed Governor Waller says “markets in general seem to be undervaluing the risk that the conflict (in the Middle East) continues, the Strait remains closed, and disruptions to production and shipping keep energy prices high,” adding that “for inflation, the risk is that the longer the conflict drags on and energy prices remain high, the more likely it is that these elevated prices will bleed into other prices, as businesses incorporate costly energy input costs in setting their prices.”
ECB’s Demarco says he doesn’t “see any necessity for us to take hasty decisions on (interest) rates,” noting that by the time of the next but one monetary policy in June, “will have more data and information both about underlying inflation and any signs of indirect effects as well as the evolution of the conflict.”
Looking to the week ahead, markets will obviously be focused on developments in the Middle East. In terms of economic data, flash PMIs for April are due in the main economies on Thursday; CPI and labour market reports (for February and March respectively) are scheduled in the UK on Tuesday and Wednesday respectively; and retail sales for March are published in the US tomorrow (Tuesday). A good number of ECB members are lined up to speak over the course of the week.