11th May - Deal Or No Deal

Forex

As has been the case since the start of the war, the key news over the weekend has been from the Middle East. Iran has responded to the US proposal, and Trump has posted on social media that their response is 'totally unacceptable' - there are reports that Iran's proposal demanded recognition of sovereignty over the Strait of Hormuz, compensation for war damages, and notably did not mention the nuclear issue. Both sides seem entrenched in their positions; both seem to want to come out of the conflict as 'winners' and looking strong, as the ones who forced their opponent to 'submit'. This seems to be a factor in making a deal seem unlikely; the positions on either side are fundamentally incompatible, and so only significant concessions seem to be needed to move forward. Whether it is down to bravado, pride, or necessity, at present there seems not to be a clear path forward.

The other factor weighing heavily on markets over the weekend was Friday's NFP report, which saw a substantial beat on expected figures (115k compared to an expected 62k, with last month revised upwards to 185k). This was a significant beat and showed that the US labor market is holding up far better than expected. Along with the renewed possibility of higher oil prices for longer, this has further played into the higher for longer interest rate narrative for the FOMC.

The combination of higher for longer rates and increased uncertainty in Iran should create an environment for USD strength this week, something we have already begun to see on Monday morning. Originally on Friday after the NFP results dropped, we actually saw a fall in USD strength as oil was falling and peace optimism was still in place. Over the weekend, however, we have seen the DXY gap higher, with the NFP news and peace deal uncertainty taking over the narrative. Unless we see a noticeable shift in tone around Iran, we could expect to see the safe-haven USD play to gain traction over the next few days.

USD/JPY should be an interesting pair to watch over the course of the week. After BoJ interventions over the past two weeks saw the pair fall from 160.00 down to 155.000, the pair has picked up ground and is now back at 157.000. With oil prices looking to stay elevated for longer, the energy price-dependent JPY is continuing to see pressure, while the higher-for-longer rate story with the USD is adding demand to the long side. It means we could very well see the pair move back up to the 160.000 level in the near future and see the BoJ with yet another decision to make. How many times and how strongly will they be willing to intervene in a market that seems to be only moving one way?

Outside of the USD, the GBP will have to digest the outcome of the UK elections that saw the incumbent Labour party suffer heavy losses. The elections do not change the makeup of the Houses of Parliament themselves, but are a strong indicator of public opinion and of the confidence the British people have in those governing. The UK Gilt market yields are already elevated on concerns with the strength of the UK economy; poor results for the Labour party will only raise concerns and increase uncertainty. It will be interesting to see how the currency responds. It will be supported by BoE rate hike expectations but will face a headwind from concerns about the strength of the economy.

The CAD has been struggling over the past few days due to the fall in oil prices. Should oil start to increase surrounding renewed concerns with the Middle East, we could see some support return for a currency heavily reliant on the oil market. If we do find a breakthrough, even though CAD is normally a risk-on currency, I can only see CAD continuing to lose ground as oil prices fall.

Indices

Thanks to the strong NFP numbers and what had been optimism surrounding the Middle East, indices yet again had a strong day on Friday, with fresh all-time highs in the S&P, Nasdaq, and Nikkei. The less tech-heavy Dow also saw gains, though it still sits a little way off from its all-time highs. The market was still booming after positive earnings from the Mag7 companies recently, while also taking the NFP figures as proof that the resilient labor market will support consumer spending and so give further fuel to the earnings cycle driving the rally.

However, with peace optimism fading over the weekend and oil rising, it will be interesting to see if this can have an effect on the markets or whether they will bully their way through any near-term headwind they find. Paul Tudor Jones' comments about the similarities with the 1999 market are ringing truer than ever at present; we are currently in a market that should have significant headwinds but is showing more strength than ever. My concern is that one negative catalyst could burst the bubble and be the cause of a violent drop in the markets. I do not see this being a 2008-style crash, so if we do see this, it could end up being an excellent opportunity for long-term buys.

Precious Metals

Gold has fallen away from the highs it saw around $4,760, thanks mainly to the positive employment figures from the US. As we have detailed here a number of times, the normal safe-haven play for precious metals has been completely overwhelmed by the rate-hike narrative in the USA, meaning counterintuitively the war has seen precious metal prices fall. We will continue to see this until oil prices fall and inflation concerns reduce. Once this happens, the fundamentals are still strong for gold to move back towards $5,000, but until the Iran situation is resolved, it will continue to be under pressure.

This Week's Key Market Drivers

• Iran - This will, as it has been, be the most significant area for the week. News either way will move the market significantly; any change in sentiment will continue to cause swings until we have a more concrete future path that markets can trust.

• Trump's China Visit - Trump will be in China from the 13th to the 15th of May, which could see significant announcements around things such as trade, Iran, and even Ukraine. Xi's willingness to pressure Iran could be a key variable in finding a way through the stalemate we are currently in.

• US CPI - We see the key inflation metric for the US on Wednesday. This will be very important for future rate decisions from the FOMC, and so unexpected numbers could have a huge effect on all markets.