Israel/Iran conflict continues to drive volatility

Reports and counter reports that the Israel and Iran conflict was easing or intensifying saw market calm yesterday but then reverse course overnight. Initial reports that Iran was seeking to de-escalate the conflict and return to nuclear talks with the US saw the dollar lose its gains yesterday with the euro back above $1.16 and sterling back above $1.36 for a time with equities taking back losses from Friday while oil prices also eased. However, overnight, President Trump downplayed hopes for an early ceasefire and saying residents of Tehran should evacuate. That saw negative sentiment return to the market, with the euro at just above $1.1550 and sterling at just above $1.3550 now. EURGBP is little changed at 85.2p.

That period of more positive sentiment yesterday supported equity gains with the S&P 500 up 0.9%, back above 6000 and just short of its record level. European equities also benefited with the Eurostoxx up 0.9% and the FTSE making smaller positive move, up just 0.3%. However, stock indices are falling on the open this morning. Oil prices eased yesterday with a barrel of brent crude down 3% to below $73 though, again, prices are edging higher this morning. The easing back of oil price is particularly relevant as should oil prices not have a sustained increase in price, then inflation concerns should fade once more. That sentiment helped government bond yields with 2- , 5-, and 10-year yields in Europe down by a few basis points yesterday, but similar to other markets they are reversing course this AM and yields are ticking back up again.

The Empire manufacturing survey for June broke a run of more positive US sentiment data. It fell to -16 in June, when an improvement was expected, from -9.2 in May. However, the detail was more positive from New York manufacturers as the drop was all due to a decline in current conditions – with new orders and shipments indexes both slipping – while businesses were much more optimistic about the outlook than they had been. The expected conditions index rose to 21.2, from a negative reading last month, boosted massively by an expected easing in trade tensions and employment metrics also improved. So the underlying position is positive and this index suggests the ISM manufacturing index for the whole of the US may improve in June, though still remain in slightly contractionary territory.

ECB Governing Council member Joachim Nagel said the Bank shouldn’t commit anything over the next few meetings. The Bundesbank President said that ‘factors can change quickly in the current environment’ and the ECB had to stay ‘flexible’ which means that ‘pre-determining the future – either a further interest rate cut a pause in monetary policy – is not sensible’. He added that recent data and ECB forecast suggest ‘mission accomplished’ on inflation but that there is ‘no reason for compliancy’ and it was important to keep ‘eyes and ears open for risks to price stability’.  This type of commentary is unsurprisingly from Nagel who would be from the more hawkish wing of the ECB and likely would like the ECB to keep its power dry while it assesses the changing geo-political environment and incoming data.

Looking to the day ahead, we get German ZEW surveys and US retail sales and industrial production while Villeroy and Centeno are among the speakers.