15th June - True Peace It Is
- 4 days ago
- 7 min read
Geopolitics
After three and a half months of fighting and countless false dawns during negotiations, it was announced over the weekend that a deal has been reached between the US and Iran. This has been confirmed by President Trump, by the Iranian Supreme National Security Council, and by the Pakistani PM Sharif, who had been mediating the discussions. The deal is set to be formally signed on the 19th of June and is reported to include Iran re-opening the Strait of Hormuz within 30 days, the US blockade being lifted, the US releasing £25 billion of frozen Iranian assets, a removal of oil sanctions and establishing the framework for longer nuclear negotiations to follow.
It is worth noting, however, that the deal has been agreed but not signed. Whilst it is likely that it will be signed and the markets are treating it this way, Israeli strikes against Beirut over the weekend were a timely reminder that nothing is yet set in stone. On top of this, it will not be a simple flick of a switch to go back to normal on Friday once the deal is signed. Re-opening the Strait of Hormuz will take time as mines need to be removed from the waterway and the backlog of vessels needs to be worked through. This process will take months, not days. Additionally, it will take months more for oil supplies to make their way around the globe and to ease the supply shock the war has caused. The agreement is undoubtedly a good thing, but there is damage that has been done that will take time to recover from.
Oil fell over the weekend, with Brent Crude falling below $90 this morning and US Oil falling to just above $80. Both are still some way above the pre-war levels. Until the supply shock is unwound, we can expect to see oil prices stay elevated and inflation remain a concern for the near future.
Forex
The news over the weekend could have a significant impact on forex markets, both in the shorter and longer terms, with each currency being impacted in a different way. However, each of the effects described below is reliant on the market reacting to the news of the ceasefire as if it is fresh news. There is a distinct possibility that the markets have already mostly priced in the peace deal for the medium term, with the moves over the past 48 hours being largely noise. This week will be key to gauge just how much of a deal is already priced in and how much is left to factor in.
USD stands to be a loser on the news overall. Safe-haven demand has already begun to fall away from the USD, which was the only currency that saw a concerted boost in this regard during the conflict. Additionally, the opening of the Strait will help with inflation and will ease rate-hike concerns, further removing demand from the USD. The fundamental data we have seen in the past few weeks (strong jobs data, higher than expected PPI, strong PMI data, etc.) does give the USD some support, but the change in global circumstances seems likely to remove demand in the short term at least.
EUR stands to be a beneficiary from the news. The eurozone's dependency on energy imports means the news removes an area of concern and will bring capital back into the EUR as businesses recover. We have also seen the ECB hike rates and then come out with hawkish guidance afterward, giving a further boost to the currency over the coming weeks. The potential is there for the EUR/USD to move higher as safe-haven demand continues to unwind.
GBP continues to be a little isolated. It is seeing some support from gilt yields returning to more normal levels, but there have been some further discussions around the PM Keir Starmer's future over the weekend. He had to make a statement to the BBC confirming he feels it is his 'duty' to carry on and did not want to subject the country to another leadership challenge. This political uncertainty will be a drain on the GBP's appeal, which combined with the BoE's comfort with interest rates as they are, should lead to less of a demand than there will be for the EUR over the coming months.
CHF will lose what little safe haven demand it had during the war. Trading in the Swiss Franc will revert back to the fundamentals around the currency and the SNB's near-zero interest rates.
JPY will benefit, as Japan's dependence on Middle Eastern oil will mean inflation concerns will ease, and capital will be able to flow back into the country. Coupled with the expected BoJ fiscal policy tightening, we could see demand flow back into the JPY that has been missing for a long time. The USD/JPY pair could start to fall away from the 160.000 level that has been so keenly watched over the past few weeks, possibly doing the job for the BoJ who in the short term would no longer have to consider manual interventions.
CAD, AUD, and NZD will see movement in line with their commodities in the short term. We have already seen CAD fall as oil prices drop and AUD rise along with precious metals. We may, however, see less reliance on the commodities for price changes over the next few months. As prices for oil and metals stabilize, we should see focus return to each currency's fundamentals to influence the price moving forward.
Indices
After the fall in indices for most of last week, the period from Trump's announcement to today has seen indices gain significant strength, with the Dow Jones and the Nikkei even reaching all-time highs this morning.
The SpaceX IPO was the event on Friday, opening at $150 (above its initial pricing of $135) before ending the day at $161, a 19% gain on the day and confirming its status as the largest IPO in history. The success of the IPO on opening day, coupled with the news from Iran, has caused a wave of optimism in markets, eclipsing the concern that was starting to take hold in the middle of last week. Former Nasdaq chief Robert Greifeld noted that SpaceX "represents a stock that's trading not on fundamentals" but "on the aspiration of what's possible." To me, this is the perfect analogy for the market as a whole with recent the AI and tech stock boom; the markets are currently fuelled by potential as much as hard data.
My fear is that the peace deal in Iran is already mostly priced in and markets are riding a wave at the moment. As we have discussed, the effects of the Iran war will not disappear overnight, so I worry that in a few weeks' time, when the euphoria of the peace deal and SpaceX IPO have worn off, markets will still see heightened inflation and economies still struggling with sticky oil prices and realize they got ahead of themselves. To me, the asymmetric risk is still at play; there seems to be limited short-term upside in indices and a large potential downside should market sentiment turn. I hope to see a gentle release of pressure from the balloon over the second half of the year, but I am still worried we are continuing to pump air in and will see a pop.
Precious Metals
We have spent the entirety of the conflict in Iran discussing the inverted nature of precious metals. We expect to see demand in times of conflict, but instead, we have seen prices fall. We have mentioned that this is due to rate hike concerns removing demand from the non-yielding assets, and that the rate-hike channel has up until now completely outweighed any safe-haven demand for gold or silver.
The assumed end to the conflict in Iran will now test this hypothesis. This is, of course, reliant on inflation falling and central banks no longer feeling the need for higher rates. The risk to precious metals is that inflation remains sticky and interest rates either stay where they are or are hiked. Both gold and silver have made recoveries since the news on Thursday, with gold 7.8% up from its lows and silver 15% up, implying that it was indeed the rate hike fears suppressing the demand for precious metals. This is just the instant response, however; we will need to watch for the next week or two to see if this move is sustained.
I would expect to still see some weakness in the short to medium term for precious metals as the energy supply shock slowly works its way through the system. The instant response to the deal is not necessarily the same as the medium-term effect; it may just be a pullback before a continued move lower while we go through a short rate hike cycle.
This Week's Market Drivers
Iran - The continued fallout from the agreement reached by the US and Iran will continue to affect the markets until the deal is finally signed on Friday. The more interesting factor will be how much of the deal was already priced in and how much movement is still to be seen.
FOMC Rate Decision, Wed 7pm UK time - A crucial news event for markets, the FOMC is expected to hold rates, but as this is the new Fed Chair Warsh's first decision, the guidance around the event could have a profound impact. Unexpectedly dovish or hawkish language will be a market mover.
AUD & JPY rate decisions, Tuesday - Both will have an impact on their respective currencies. As with the FOMC decision, the guidance from the central banks will be what we need to look out for.
GBP & CHF rate decisions, Thursday - Rates are expected to be held by both the BoE & SNB. What will move markets will be the vote split for the BoE decision and the guidance given by each central bank after the announcements.
GBP CPI print, Wed 7am UK time - This will likely have an effect on the BoE rate decision the day after this print is released, so any unexpected figures will be market-moving for the GBP.
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