20th July - Escalations Continue
The strikes by the US continued over the weekend, with the most recent volley of strikes the most intense yet after 3 US service members were confirmed to be killed over the weekend. The strikes have now moved to also targeting infrastructure as well as military targets, with Trump giving authority to "unleash hell" after the American deaths.
To add to this, the Iranians have now officially and formally suspended their commitments to the June MOU, with Iran's Supreme Leader noting Trump's signature on the document as "utterly worthless and devoid of credibility." The Strait of Hormuz has now been down to around 10% of normal capacity for the past week, with the Iranians claiming the Strait is closed but the Americans claiming it is still open for passage.
The market has now watched a closed Strait, an expired OFAC license, a formally repudiated MOU, three dead American service members, and a President reportedly ordering the gates of hell opened — and equity futures are down 0.2% with Brent at $90. We would normally expect a far more significant response to this news, with prices far more volatile than we have seen (markets did fall last week but not to the extent we could have expected). Either the market is making a judgment call that this is temporary and that the oil supply can hold up, or is being complacent about the very real risks to the global economy. If this escalation continues for the duration of this week, it will be very interesting to see whether the markets are still holding on to their optimism. During this war, we have seen on a number of occasions, markets seemingly on the brink of panic, before rallying on any good news. Whether we see this again this week will be the key story to look out for.
Forex
The USD is still holding steady after the weekend strikes, still sitting around the key 100.650 level on the DXY. We would have expected more dollar strength as a safe-haven play, but we have not yet seen this materialize. Whether this is due to the fallout of the weak inflation prints last week, or the market's belief that the Iran escalations are only temporary, is difficult to parse out, as both catalysts were happening simultaneously. This week should give us a better indication as to whether there will be a flight to the USD as a safe haven.
Outside of the USD, there was not a lot of movement from the other major currencies. The CAD continues to catch a bid as oil prices increase, but there was limited movement elsewhere. The CHF and JPY were relatively stable as neither saw any safe haven demand over the weekend, in the same way the USD failed to do. The EUR and GBP continued to move quietly, with the GBP still looking stronger after the political changes in the UK over the past week. The AUD and NZD were also steady on Friday and into Monday, after a good week for both last week.
Forex markets seem to be in a 'wait and see' mode this morning, so a larger news catalyst could potentially cause chaos this week.
Indices
This is where the real interest was on Friday and over the weekend. On Friday, the S&P 500 fell -1.01% to 7,460, the Nasdaq Composite -1.40% to 25,520, and the Dow -0.77% to 52,120. We have recently seen some indices fall in a session whilst others rise or stay flat; this is the first time in a while that all indices have fallen on the same day.
Whilst this is only one session, the fact that all of the indices fell is worth noting for this week. Should the escalations in the Middle East continue and oil continue its rise back into the 100s, would we see a general market pullback where all of the indices struggle? Or would the market continue to underplay the situation and react to more traditional catalysts like inflation and NFP figures?
Looking under the hood from last week, companies such as Travelers rose 9.3%, Cisco 2.1%, and Chevron 1.9%. It was again the tech/AI sector falling that caused the weekly falls in the indices. The PHLX Semiconductor is now down over 20% from its highs, whilst the VanEck Semiconductor ETF fell almost 9% on the week, its third weekly decline in four. The question then becomes whether AI stocks will bounce back, will they drag the market down with them, or will the balloon deflation theory play out smoothly and we only see a fall in AI/tech stocks. I think this week will be a huge indicator as to what we will see for the second half of the year. We seem as though we may be close to a turning point in sentiment towards these stocks, and another week of losses could be enough to lock in the change of sentiment for a longer period.
Precious Metals
Not that it is needed at this point, but the weekend was once again evidence that the safe-haven demand for metals is completely inert at this point in time. The escalation over the weekend has not moved the markets significantly once markets re-opened for this week, with Gold still rotating around the key $4,000 figure and Silver at the recent resistance level of $57. As with indices, this week could be a key week for metals. If Gold can break meaningfully through the $4,000 level, we could see some significant downside over the next few weeks, as expectations for inflation rise on higher oil prices and the US rate-hike cycle becomes more baked in as each day passes.
It has been said before but bears repeating: I struggle to see any upside in metals until we see a meaningful turnaround in rate hike expectations, and potentially not until we actually begin to see rate cuts predicted. Precious metal bulls had a sensational 2025, but it looks as though 2026 will be the year of the metal bears.
This Week's Market Drivers
Iran - This has jumped back to the top of the pile when it comes to influencing markets, after taking a back seat in June. Any updates of significance from the region will affect markets significantly.
Oil Prices - These will have to be watched carefully. If we continue to move back up to $100 per barrel, there will be lasting consequences on inflation and the world economy as a whole.
CAD CPI, Monday, 1:30 pm UK time - Inflation for Canada. This shows last month's figures as the US CPI did last week. This will still have an effect on the CAD but will not be a general market mover.
UK Claimant Count Change, Tuesday - A useful metric to gauge the health of the UK economy.
UK CPI, Wednesday - As with the CAD release on Monday, this will be for June's figures but will still have an effect on the GBP.
AUD Unemployment, Thursday - Another useful release to analyse the health of an economy, this time for Australia.
EUR Interest Rate Decision, Thursday - This is a key decision for the EUR. An unexpected rate decision will be very significant, but more likely we will see rates stay the same, and so the forward guidance will be what moves the EUR the most.
Comments