13th May - Bull In A China Shop

Forex

Yesterday saw market sentiment towards Iran move away from confidence and back towards concern about military re-escalation, with reports emerging that Trump is considering restarting combat operations and the President's own social media message that the ceasefire is on 'life support'. This makes the Trump-Xi meeting, which is due to begin today, even more significant. China has significant leverage over Iran as one of its largest oil customers. Could the rumors of restarting combat be a way to put pressure on Iran in advance of the summit, or is it a genuine consideration? Trump's boisterous style when it comes to diplomacy and negotiation makes it difficult to say either way, so any leaks or press releases from the meeting will be pored over by markets.

Yesterday also saw the US release CPI figures, which came in high and slightly hotter than expected, at 3.8% YoY against an expected 3.7%. The more interesting part of the release was that core CPI also was above expectations and that 'Supercore CPI', which strips out housing, food, and energy, also rose to 3.4% YoY. This is telling us that inflation has made its way past just energy prices, that it is now affecting the economy as a whole, meaning it will not fall away as quickly as it rose and that inflation is here for longer. This has changed the narrative again for rate hikes, with the odds of a rate hike by the end of the year now up to 30%, something that was unthinkable before the conflict started.

The combination of increased uncertainty and strong CPI gave us a strong day for the USD yesterday, as would have been expected. The DXY rose past 98.00 on the day and looks set to continue back towards the 99.00 level we saw before the peace deal talks were announced at the end of April. The current momentum is with dollar strength; we would need a significant development in China over the next few days to change that.

The GBP has continued to show weakness, backed by continued uncertainty over the future of Keir Starmer. Yesterday we saw 4 MPs resign and more than 80 have urged him to resign, while another 100 or so have signed a letter backing the Prime Minister. Starmer is set to have a meeting today with a potential leadership rival in Wes Streeting, then later today we have the State Opening of Parliament, which includes the King giving a speech written by the government on their plans for the upcoming year. Today could potentially be an important day for Starmer; if he is able to shore up his position, we could see some reduced uncertainty and demand flow back into the GBP. We are still seeing gilt yields concerningly high, however, jumping again yesterday to new recent highs on the uncertainty, so for the time being GBP seems likely to continue to suffer from downward pressure.

Oil prices have been steadily making their way back up through the start of this week, after Brent Crude touched as low as $100 at the end of last week. This has had a positive effect on CAD as it continues to move in line with oil prices, while weighing down on the energy-dependent JPY. AUD, meanwhile, has continued to ride its exchange rate differential demand as it continues to strengthen. For both CAD and JPY, the effect that the China talks have on oil prices will be the most acutely felt factor and one to be monitored, with the direction potentially going either way depending on the outcome of the talks.

Indices

Yesterday was a red day for the S&P, Nasdaq, and Nikkei, while it was largely level for the Dow. The markets seem to be digesting the rising tensions around Iran before reacting negatively to the CPI print yesterday. It is worth noting, however, that the indices as a whole recovered almost instantly from the CPI print and have continued to rise into this morning. Higher inflation was already baked into the markets, so a 0.1% difference has not moved the markets significantly past the initial shock. The more impactful effect could be the change in the FOMC's expected path for interest rates, but this could happen over a longer time frame and is competing against what is still a market with a huge amount of momentum. The market still seems due for a correction, but we may see some moves higher in the near term before we see any moves lower. The feeding frenzy could only intensify should we receive positive news on the Iran War over the next few days.

Precious Metals

Gold is still suffering from the rate-hike expectation increase, especially after yesterday's CPI print. The rate-hike effects are still outweighing the safe-haven demand and look likely to continue to do so until we see a resolution in Iran and inflation is eased by lowered oil prices. Until then, we can expect to continue to see gold under pressure and stuck in the $4500-$4700 range. Silver remains elevated due to the supply shock expectations after the news from Peru reported yesterday. Silver now has an additional factor affecting its prices when compared to gold, meaning for the moment at least the movement of the two is slightly decoupled. We could continue to see some strength in silver over the coming days, but interestingly any good news coming from Iran could actually have a negative rather than a positive effect. Silver is priced higher at the moment on the expectation of reduced supply due to the higher energy costs associated with mining it; if energy costs fall, it will be cheaper to mine and so supply will be expected to increase, reducing the price of the metal while gold's price is rising. This could be an interesting market to watch should we receive good news over the next few days.

Today's Market Drivers

• Trump-Xi Meeting - Talks are due to begin today, and any rumors, news releases, or social media posts can potentially be significant market movers.

• US PPI Data - After the hot CPI yesterday, higher than expected PPI would confirm inflation fears and add fuel to the fire of rate hike expectations. One to monitor on release.