12th May - The Quiet Before The Storm

Forex

Yesterday saw an unusually quiet day for recent times, with no real news coming out of the US-Iran conflict. Trump made some comments about the ceasefire being on shaky foundations, but this was already priced into the market and so did not have a significant effect. All eyes seem to be focused on the Trump & Xi meeting later this week, the outcome of which could shape the conflict moving forward. China is Iran's largest oil consumer, meaning Xi has significant leverage over Tehran should he wish to or be persuaded to use it.

As a result, there was limited movement in the USD yesterday, with the DXY staying broadly flat overall after initially gapping lower on the week open. The market seems to be waiting for news, whether it is from Iran, China, or the US, or for the US CPI prints due to be released today. Both of these will have an effect on the expected direction for the FOMC decision on rate hikes and so will affect the USD's direction. Peace optimism will reduce oil prices, reduce inflation, and so reduce the incentive for rate hikes; while the inflation figure itself will tell us how much the US economy has been affected by the oil spike already, impacting what action is needed by the FOMC to keep inflation managed.

The GBP lost ground yesterday as the markets digested the weekend's election results, with the government's weakness translating into a lack of demand for the currency. With no economic releases for the UK until Thursday's GDP print, we can expect to see the GBP continue to drift this week as political risk is further priced into the market. With huge pressure currently on Prime Minister Keir Starmer, any announcement on his future could affect this narrative, so it is something to keep an eye on.

The JPY also lost ground yesterday, as it continues to be affected by the fundamental case against it and the inflated oil prices due to the Iran war. Unless we see further interventions, the path continues to seem to be upwards and back to the always important 160.000 level, as has been flagged repeatedly.

In terms of the normally risk-on AUD and CAD currencies, we continued to see the CAD's fortunes tied closely to the price of oil, making a small gain on the day following a small gain in oil. The Canadian economy's status as an oil exporter continues to have an overweighted influence on the currency, meaning it will be disproportionately affected by the talks with Trump & Xi and any effect this summit will have on the outcome of the war.

The AUD had another strong showing yesterday but has since fallen back this morning. The currency is already supported fundamentally by higher interest rates but is also impacted negatively by growing risk-off sentiment. The key driver, it seemed, for yesterday may have been movement in gold and silver, which Australia is a large exporter of. We will look into the reasons for this shortly, but precious metals are worth keeping a close eye on if we are looking to trade AUD.

Indices

Once again, the S&P and Nasdaq saw record highs yesterday, and the Dow saw further movement back towards its own high watermark. However, yesterday we saw that the majority of companies in the indices fell while the large tech companies dominating the markets continued to rise. The fact that the markets are relying so heavily on these firms is a concern and one to continue to monitor. It makes the indices overall weaker and far more exposed to an unexpected shock—a news event that affects the AI and chip companies will not have the other less tech-dependent companies to cushion the blow. As has been mentioned in previous blogs, we continue to watch out for a catalyst that could lead to an aggressive fall while also marveling at the indices' ability to continue to rise. We are very much in an environment of 'don't buy, don't sell' at the moment. Trying to catch the top is like trying to catch a falling knife, while buying at all-time highs means you have no realistic place to place stops and manage risk.

Precious Metals

This was the most interesting sector yesterday, with Gold up 1.33% and Silver up a remarkable 7.5%. Gold saw some gains based on what seemed to be natural volatility, the lack of news from the Middle East possibly perceived as good news of progress being made quietly in the background.

Silver, however, received a huge boost on the day. This seemed to be in large part due to news out of Peru, which accounts for around 13.5% of all Silver output globally. The Peruvian government issued an 'energy emergency decree' yesterday. This did not target mining specifically, but as silver mining is very energy-intensive, any restrictions on the energy able to be used to mine Silver will cause a restriction in the supply that can be moved onto the market.

Silver is different from Gold in that it has a number of industrial applications, being used in electronics, EVs, and solar technology. As a result, the news that several major US corporate executives will be traveling with Trump to the major industrial silver consumer of China was also taken as a sign of supply concerns. This could well be a temporary surge in Silver; there are signs this morning that the price is already falling back, but it is nonetheless a fascinating market and one to keep a close eye on. If we see any positive news out of Iran that reduces oil prices and eases energy concerns, we could see another significant jump in Silver prices and a potentially lucrative trade if the timing can be nailed.

Today's Key Market Drivers

• Pre-China Iran News - Any news we hear in advance of Trump's meetings with China could be market-moving, as it remains the single most important factor in markets. Today could prove to be a quiet day as things are set in place for tomorrow's meetings, but this remains something to look out for.

• Fed Speakers - We will hear from a number of Fed speakers today, which could give some guidance as to their reactions to last week's NFP numbers and some indication as to their expectations for rates moving forward. This is unlikely to move markets in the short term, but will give some insight into longer-term directions.