10th July - Calling The Bluff
- 5 days ago
- 5 min read
In terms of geopolitics, the escalation continued for a second day, with the US launching fresh strikes on Iran and Iran once again targeting Gulf countries in an exchange of fire. Trump's rhetoric stayed hot throughout; he said he was no longer sure he wanted a deal, called Iran's leaders "sick," and described the whole thing as "a waste of time." On paper, these are exactly the kinds of comments that risk re-igniting the war and rendering the MOU useless.
And yet the market continues to ignore the comments. Despite a second day of strikes, stocks rallied and, crucially, we saw very little in the way of a panic reaction. The VIX spiked above 18 intraday on Wednesday but never came close to testing the 20 level that tends to mark genuine fear, and it drifted back below 17. Trump himself gave the tell, admitting he did not actually think the war would fully restart even as he threatened to "hit them hard again tonight." The market has looked at this and decided, for now, that it is theater rather than a return to war. The turning point that could change this is tomorrow, the 11th. If talks resume as scheduled, the market was right to call the bluff. If they collapse in the wake of the strikes, then the escalation is real.
The most interesting throughline this week has been the oil price. After surging around 5% on Wednesday, crude actually stalled and slipped lower through Thursday, with WTI back around $73 despite the fighting. Part of this is the same "no full-scale war" bet, but part of it is a bearish inventory build and, more importantly, the sheer scale of the oversupply sitting underneath the market. The OPEC+ additions and the returning Saudi and Iranian barrels have not gone anywhere; they have simply been masked by the war premium. If the strikes stay contained, that glut could reassert itself very quickly, and the disinflation story that looked to be under threat 48 hours ago comes straight back into play. That makes tomorrow's talks and the CPI print on Tuesday the two hinges for the entire macro picture.
Forex
The cleanest signal in the whole market right now is the silence from the dollar. The US Dollar Index sat at 101.08 on Thursday, up a negligible 0.05%, essentially flat on the second day of an active exchange of strikes with Iran. This is the key point. If the market genuinely believed we were heading back into war, we would be seeing the same safe-haven dollar bid that defined the start of the conflict back in February. We are simply not seeing it. The dollar's refusal to move is the market calling the bluff, and it has now held for two sessions in a row. The signal to watch into the weekend is a simple one: if the dollar suddenly starts catching a safe-haven bid, that is the tell that the market has stopped believing this is theatre.
Elsewhere, the pairs were quiet largely because the dollar was quiet. USD/JPY continues to sit near its multi-decade highs, caught between a mild safe-haven bid for the dollar and risk-off flows into the yen that keep canceling each other out, while the large rate differential keeps the underlying pressure to the upside. The Canadian dollar remains the clearest beneficiary of the oil story, although Thursday's slip in crude took some of the shine off. The pound continues to hold firm on the smooth-looking Burnham transition, and the euro was steady but uninspiring against the flat dollar. The kiwi, meanwhile, is consolidating after the RBNZ's rather dovish hike to 2.50% earlier in the week.
Indices
Markets shook off the escalation and pushed higher. We saw the Nasdaq gain 1.30%, the S&P 500 rise 0.81%, and the Dow add 0.27%, with the Russell 2000 up 1.22%, so this was a broad recovery rather than a narrow one. Once again, it was the chips leading the way, with the semiconductor sector climbing on a genuine catalyst as SK Hynix priced its US IPO at $149 a share ahead of its listing today, giving Wall Street another way to play the memory boom. Broadcom also rose sharply on the back of an expanded partnership with Apple worth over $30 billion.
The honest read here is that the last few sessions have muddied the clean growth-to-value rotation we had been tracking. The AI names have, for now, found a floor and are leading the recovery rather than deflating. I would still hold two cautions, though. Firstly, this strength is being driven by specific one-off catalysts, the SK Hynix listing and the Broadcom deal, rather than a broad re-rating of the sector. Secondly, and more importantly, Q2 earnings season is now getting underway in earnest. PepsiCo already disappointed on Thursday and Delta reports today, so we are about to find out whether these valuations are actually justified. The balloon has not reinflated so much as it has stopped deflating for a few days, and earnings will decide which way it goes next. As can be seen in the graph, the market range is tightening and forming into a wedge pattern. This tends to show there is bottled-up volatility, most likely in anticipation of next week's CPI print. It also means that if we do have a catalyst such as a strong or weak CPI, markets could move quickly and significantly one way or the other.
Precious Metals
Gold steadied after Wednesday's drop, trading around $4,115 and finishing roughly flat to slightly firmer on the day as the dollar stayed quiet and yields held rather than spiked. It remains stuck in the same bind we have documented for months; the safe-haven bid that the escalation should be providing is being neutralized by the elevated-yield backdrop, leaving the metal rangebound rather than rallying on genuine geopolitical risk.
The near-term picture is unchanged and the discipline still applies. With the 10-year yield at 4.56%, the FOMC minutes confirming a committee that actively discussed hikes, and oil still elevated, the rate channel keeps a firm lid on the metals. The CPI print on Tuesday is still the dated catalyst, but its signal value has been diminished somewhat, because the market will likely look straight through a soft June reading, which captures June's cheap oil, towards a July number that the strike-driven spike now threatens to make hotter. As always, it is better to jump on an established trend than to try to catch a falling knife. If tomorrow's talks resume and oil resumes its slide, the disinflation and metals thesis comes right back; if they collapse, the rate channel stays shut and the metals stay under pressure.
Todays Key Market Drivers
Iran - Going into the weekend, the most impactful news event could be the scheduled talks tomorrow. Any news today that these have been canceled or confirmed to go ahead will affect the market's views on the conflict, and so could move markets significantly.
BoJ Intervention - Will the BoJ wait until next week's CPI to intervene, or will they take the jump today before a potentially volatile weekend? The pair should be kept an eye on to see.
CAD Unemployment Rate, 1:30 pm UK time - This is the only news release scheduled for the day. It will affect the CAD but should not affect other markets.
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