12th June - TACO Or True Peace?
Geopolitics
What a difference a day makes. At the start of the day yesterday, we were expecting further escalation in Iran. We then had a social media post from Donald Trump where he advised he would be hitting Iran "very hard tonight" and that the US would be taking Kharg Island, a key facility that 90% of Iran's oil exports pass through. This most likely would have involved boots on the ground and would have been a significant escalation.
Markets were preparing themselves for what was to come. Then, during the afternoon, reports emerged that despite the rhetoric from Trump, the two sides were still talking and still negotiating. Five hours after the initial post advising they would be taking Kharg Island, Trump released another social media post and advised that the strikes had been canceled, that a deal had been all but agreed, and that it could be signed over the next few days.
The whipsaw in pricing across all markets was significant, with a movement in the course of a few hours from risk-off to risk-on. The deal has still not been completely agreed, and we have been in the position before where Trump has announced a deal is imminent, but the fact that Trump has moved away from putting US boots on the ground has given the markets some significant relief.
The question remains, however, was there a genuine breakthrough in talks or did Trump shy away from following through on his threat? The TACO trade (Trump Always Chickens Out) has been one that some investors have used to make healthy profits. Trump inflates rhetoric and makes bold claims over possible actions that markets react to, before changing his mind ('chickening out') and instead takes a more reasonable course. Whether this has happened here and the threats on Kharg Island were empty remains to be seen, but it is important not to assume that a deal is now done. We may see a deal signed soon, but we have been here before with this conflict a number of times and we are still waiting for pen to hit paper.
Forex
The news from Iran caused a lot of movement in currencies, thanks to the run to risk-off and then sudden reversal to risk-on throughout the day. Yesterday saw PPI prints released in the USA, which were an interesting mix. The headline PPI m/m print was significantly above expectations (1.1% against an expected 0.7%), while core PPI m/m that strips out energy and food costs came in below expectations (0.4% against 0.5%). This mix of hot overall and cold core readings showed us that the increase in inflation is largely caused by energy and that it may not be as baked in for the long term as had been feared, but the hot overall figure drove support for the USD during the day. Coupled with the threats from Trump, going into the US session the DXY was moving comfortably higher.
The post from Trump advising the strikes were cancelled then completely flipped the narrative and so flipped the markets as well. The DXY went from a gain of 0.2% on the day to a loss of 0.5% on the day. The PPI printing the way it did, coupled with positive news from Iran, has meant a release of pressure on the FOMC to hike rates — if inflation is being caused by a spike in oil and the cause of the spike may be resolved soon, the expectation would be that inflation would move lower with lower oil prices. Consequently, rates do not need to hike to curb inflation concerns that will resolve themselves. If we do see a confirmed peace deal, then we can expect capital to move further away from the USD as it loses its safe-haven demand and rate-hike concerns ease.
The ECB hiked rates yesterday as expected, but the unexpected news was the hawkish tone held by ECB President Lagarde. She warned of "further ground to cover" and that they are not yet at their final destination, implying there could be further hikes to come later in the year. This news was overshadowed by the events in Iran yesterday, so it did not cause a significant move in EUR, but it is likely to give the EUR a base of support over the next few weeks as markets start to consider the post-Iran environment.
Commodity currencies again moved significantly with their commodities, further reinforcing that the market at present is solely focused on events in the Middle East. We saw oil fall in price on the news of a possible deal (US Oil fell 5.25% and Brent fell 6.25%), and so also saw CAD fall on the day as well. Precious metals caught support yesterday, meaning AUD and NZD also rose on the day overall. The GBP, CHF, and JPY meanwhile did not see any significant change in demand and were relatively stable on the day overall, especially considering the circumstances.
Indices
The indices had a bumper day yesterday, though interestingly it does not seem to only be due to the news from Iran. The news absolutely helped, but some of the day's move had already happened by the time we heard of the change of course. The Nasdaq, for example, rose 4.38% on the day, but was already 2% up on the day by the time we saw the PPI data release at the start of the US session.
The implication is significant; markets were reversing some of the move from Wednesday already and were not significantly affected by the hot overall PPI print. The Iran news was the added fuel as opposed to the initial catalyst. One reason for this could be the enthusiasm surrounding the SpaceX IPO due to go live on Friday, with its opening price set at $135 yesterday. This event is only adding to the excitement around the AI sector and will become the largest IPO in history. It has seen record interest and could even have been some of the reason we saw markets fall in the first half of the week. If investors want to invest in the IPO, they need to get the money from somewhere. We therefore could have seen the fall over the last few days being due to capital being removed from the market in advance of it being re-invested in SpaceX, as opposed to any more significant market rotation over the longer term.
However, there are concerns among the market that this is another sign that we are in similar territory to the Dot Com bubble. We are also due to see OpenAI and Anthropic go public in the near future, two more huge AI companies that will have a significant impact on markets. Neither of these companies are currently making a profit, as one portfolio manager noted, "if OpenAI and Anthropic can't make money, this whole thing falls apart." Going back to the balloon analogy from a few days ago, instead of slowly releasing air to deflate the balloon, these IPOs could instead mean we are pumping the balloon with more and more air until eventually there is an even more violent pop.
The IPOs themselves and the narrative surrounding them will be a very important thing to monitor over the coming weeks and months.
Precious Metals
We saw significant support for both Gold and Silver yesterday, almost entirely thanks to the post from Trump announcing no strikes. This further reinforced that precious metals are overwhelmingly influenced by the rate-hike risk from the US, as normally a risk-on news event such as this would be negative for precious metals. They were also helped by the lower core PPI figure, implying inflation may not be as sticky as feared and we could see less need for a rate hike later in the year.
Both Gold and Silver now need a shift in narrative with regards to rate hikes. Once we see these hike fears recede, we will see some support for the metals return. However, we still need a signed deal between the US and Iran for this to happen, which is by no means a certainty based on the past few months. Yesterday was the first day in a while that saw genuinely good news for metals. We now need to see if the news follows through to concrete actions.
Today's Market Drivers
Iran - Is a deal close to being signed, or are there still hurdles to overcome? An answer either way will shake the markets yet again. There is no other news for the day that can come close.
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