19th May - Mixed Signals

Geopolitics

Yesterday was a confusing day with regards to the Iran War. Early in the day, we began to hear positive news, with word of a possible temporary US waiver on Iran oil sanctions and then an Iranian source claiming the US has shown flexibility in ongoing discussions. However, we then heard from the US that Iran's new offer was insufficient and risked a resumption of hostilities. We learned the rumors about raising oil sanctions were false and finally heard from Trump that there would have been an attack on Iran today if Qatar had not asked for the US to hold off.

The whipsaw effects were noticeable and left the market with no more certainty as to the near-term outcome of the conflict than at the start of the day.

The other significant thing of note is with regards to oil, with reports emerging that physical shortages are looming over Europe by the end of this month as reserves are running dry. Even with a reopening of the Strait of Hormuz, it takes significant time to restock global reserves, and so the lack of reserves could lead to a worsening of the supply shortage in the near term. This could see oil prices rise even further than the current elevated levels and cause further inflation shocks in global markets over the coming months. The oil markets are key to keep an eye on for the remainder of this month and into June to see if these fears are realized.

Forex

The USD fell back a little yesterday after last week's relentless move upwards, bouncing off the 99.000 DXY level and falling back into the 98's. This did not seem to be a change in momentum, however, as there has not been a meaningful change in the situation to warrant USD weakness. It is more likely that the markets were taking in some of the news from the Middle East and some profit-taking on the back of the large moves last week. This morning we have already seen the DXY move back north of 99.000, so unless there is a meaningful de-escalation in Iran, there does not seem to be anything to stop the DXY from moving back to test the key psychological level of 100.000 towards the end of the week.

The GBP is the most interesting currency so far this week, with the background of political uncertainty and high gilt yields. Yesterday we saw some significant backing for the GBP after heavy selloffs last week, thanks to a drop in gilt yields from 5.85% to 5.73%. This seemed to be in large part thanks to political developments, particularly comments from Andy Burnham, the current Mayor of Manchester and the man considered the strongest candidate to take over from Keir Starmer. Over the weekend, the path opened for him to regain a seat in Parliament (something needed before he can challenge for the premiership), and on Monday he committed to sticking to the government's existing fiscal rules. This is significant as it means he would not be encouraging extra spending and thus diluting the UK bond market. The remarks caused the fall in gilt yields and thus the backing for the Pound.

It will be interesting to see today if there is any follow-through or if it was a temporary pullback. There are still significant fundamental headwinds for the GBP, however, so unless these winds change, it still seems likely that the GBP will struggle in the near future.

Outside of the GBP, the remaining major currencies all had mixed days, as the markets took in the news over the weekend and struggled to make sense of the conflicting news coming from Iran. The CAD remains supported by oil prices, which look set to continue should the fears of possible depletion of global oil reserves come to pass. JPY is similarly affected by oil but in the opposite direction and will continue to be affected as long as oil prices remain high.

Indices

Indices were mixed yesterday, with the Dow outperforming both the S&P 500 and Nasdaq, while the FTSE 100 jumped on the news from the UK. The divergence between the Dow and the tech-heavy S&P and Nasdaq feels key, as it was tech stock declines that caused the fall in these two. Yesterday could have been the first sign of the unwinding of the narrow leadership of tech stocks, so movement today will prove very interesting as we move forward in the month. We have Nvidia earnings released tomorrow, which could be a significant indicator as to the path we take over the coming months. If Nvidia struggles, it would be the first significant chink in the armor of the mega tech companies and could signal a change in sentiment; a beat of earnings would add further fuel to the fire of AI stocks and send the indices even higher. Markets are already overextended, so further optimism could leave the indices dangerously overpriced and could lead to a deeper and more aggressive pullback than we would normally see in a healthy market.

Indices this week feel like a very important guide as to what we can expect through the summer.

Precious Metals

We saw similar uncertainty in gold and silver, with both making small gains on the day after initially moving lower in the early hours. Both metals remain close to key psychological levels ($4500 for gold and $70 for silver), and both remain subject to the same rate-hike pressures as they have for the past weeks and months. Until we receive concrete positive news from the Middle East or a dovish surprise from the FOMC, both metals will stay under pressure for the foreseeable future.

Today's Key Market Drivers

• GBP Claimant Count - The news release first thing this morning will help understand the employment situation in the UK and will either reinforce the weak UK economy narrative or start to change momentum for the currency.

• CAD CPI - Released at 1:30 pm UK time, oil prices will still be the short-term overwhelming factor affecting the CAD, but the CPI figures will help us understand the Bank of Canada's rate plans for the long term.

• Iran - As has been the case since the start of the war, any news from the region will be the main market driver of the day and will be the one thing to stay on top of.