14th May - Bated Breath

Forex

President Trump arrived in Beijing yesterday ahead of the summit with President Xi, with the world focused on the outcome. Talks are likely to be centered around Iran, Taiwan, trade, and AI. Xi does have significant leverage in the meeting; China is Iran's largest trade partner for oil, meaning it could be a strong bargaining chip in the negotiations around a permanent end to the war. Markets are eagerly anticipating any news or leaks from the summit and how it could affect both geopolitics and economics.

Yesterday also saw US PPI figures released, which were far hotter than expected, with PPI at 1.4% m/m compared to a forecast of 0.55% m/m, while core PPI was 1.0% m/m against a forecast of 0.3% m/m. These strong numbers further reinforce the rate hike narrative for the USD, baking further in the idea that inflation will be higher for longer and will not fall away quickly should the Iran war end and oil prices fall away. The FOMC's preferred metric for inflation remains CPI, but these high PPI prints are a good indication of where CPI may be traveling in the near future.

The USD continued to see gains yesterday, as the currency is now being backed by both safe-haven risk and also potential FOMC action on interest rates. The move was limited to the European session, though, as the market is now waiting on the outcome of the Trump-Xi summit to provide further direction.

The USD/JPY continues to grind higher day by day, unwinding the work done by the BoJ and its interventions over the past few weeks. The continued move up to 160.000 continues to raise the question of how the BoJ will react this time. Will we see additional interventions to manage Yen strength? Would the interventions need to be larger than before to have a meaningful long-term impact? The BoJ will be hoping that an end to the Iran war and a reduction in oil prices are seen before an intervention is needed, as this would take some pressure off the energy-dependent currency and do the BoJ's work without any manual intervention needed.

The GBP continues to be under significant pressure due to the uncertain politics in the UK, but it did see a small bounce yesterday after rejecting the psychological level of 1.35000. Keir Starmer remains under heavy pressure following his meeting with the Health Secretary, Wes Streeting, yesterday morning. There is an expectation that Streeting will resign from the cabinet and mount a leadership challenge for the incumbent Labour Party. The situation could drag on for days or weeks depending on developments, meaning the GBP will remain under pressure for the near future. There was good news, however, this morning for the GBP, with GDP figures released at 0.3% m/m compared to the forecast of -0.1% m/m. The material beat of expectations should help dampen the effects of the political situation, but in the short term, uncertainty remains, and the GDP figures may not be enough to outweigh this for now.

The EUR also struggled yesterday, but we heard hawkish tones from an ECB council member, signaling there could be interest rate support for the currency in the coming months should inflation stay an issue. The CHF, meanwhile, remained relatively flat across its basket, retaining its safe-haven status among Europe's currencies. The CHF will suffer should we see a meaningful breakthrough in Iran, but until then, it is likely to retain support for the time being.

The AUD was the clear winner from yesterday, however, with the rate-differential narrative strengthening the currency against all others. With the AUD likely to receive further boosts if we see positive news in Iran, this move seems like it could continue for a little while yet. The CAD, on the other hand, remains tightly correlated with the price of oil, and so will be extremely vulnerable to any sudden moves. At present, a trade in CAD is effectively a trade in oil, so factors affecting oil need to be heavily considered.

Indices

As if by magic, once again we have seen record highs in the S&P and Nasdaq on Wednesday. This seems to be driven by optimism that tech leaders have accompanied Trump to China, and markets are hoping for meaningful progress on AI chip access for Chinese buyers and thus a significant boost in demand. The Dow lagged behind, further reinforcing that the rises we are seeing are driven almost exclusively by the AI boom and mega tech stocks.

The warning signs are still there; optimism is already baked in, and we may now even be seeing an expectation for further good news from the summit. This will mean if we do get good news, the gains will only be marginal, but bad news could have a significant negative impact. The asymmetry here is a warning against buying at all-time highs.

Precious Metals

Gold continued to fall yesterday on the continued possibility of US rate hikes, with both the CPI and now PPI figures contributing to the rate hike narrative. Until we either see a resolution in Iran and inflation fears reduce or a dovish FOMC surprise (as unlikely as that may be), gold will continue to be under pressure for the foreseeable future. Silver, on the other hand, continues to diverge from gold and remains a fascinating market to watch. While gold fell 0.65% yesterday, silver gained 0.72%, again showing the real-world industrial applications for silver are giving the metal support where gold does not. Additionally, the supply shock from Peru continues to restrict silver supply and is supporting the metal, but as flagged yesterday, if this falls away due to lower energy prices, the decoupling of gold and silver could continue as gold rises and silver falls. Again, this is a fascinating market to watch out for.

Today's Key Market Drivers

• Trump-Xi Summit Day 1 - The overriding news event for the next few days, rumors and leaks will move the market, and any press releases will be pored over by all sides of the financial markets.

• UK political unrest & GDP fallout - After the positive GDP figures released today, the GBP will take in the effects of the release while also reacting to updates with the Prime Minister and any possible leadership challenges.