20th May - Continued Uncertainty

Geopolitics

After Trump's comments yesterday that the Gulf states had asked him to postpone a strike on Iran, we have seen little progress today beyond this. There were reports that mediators had seen no significant changes in the stances of either party during peace talks, with both sides sticking to their previously established red lines that are preventing an agreement from being reached. There is the possibility of renewed strikes as early as next week if we still do not see a breakthrough, so we are now at a critical stage of negotiations if any resolution is to be found.

We also saw comments from NATO that they are considering deployment to the Strait of Hormuz should it not be open by July, signaling wider discontent that the Strait remains closed and concern about the effects it is continuing to have on the global economy.

Oil remains at its elevated level and shows no sign of reducing in price at present. If we do not see a resolution this month to the conflict, the concerns about exhausted oil reserves will only heighten, and oil prices could rise further.

Forex

The USD continued its march higher yesterday, recovering any losses from Monday on the DXY and closing well above 99.000. Along with the safe-haven demand, it is also being helped by elevated bond yields, with the US 10Y Bonds closing at the highest yield seen since Jan 2025. Higher yields for bonds increase demand, as US Bonds have to be bought with US Dollars; this demand increases the price of the USD. The higher yields also make it more likely for the FOMC to raise interest rates to keep newly issued bonds competitive, again increasing the price of the USD.

However, as we have seen in the UK, if yields rise too high, it could begin to affect the USD negatively. If we see bonds continue to rise, concerns will creep in that the US Government will struggle to be able to service its debt at high borrowing costs, which will then reduce the demand for the Bonds and so reduce demand for the USD. This 'credit risk channel' is what we are seeing in the UK today and could be not too far off for the USD. In the near term, higher yields are likely to support the USD; if we see the US 10Y get up to around 5%, the common consensus is this could be the area where sentiment shifts and we begin to see it affecting the USD negatively. It is worth keeping this in mind for any longer-term traders looking at USD longs.

After a strong showing on Monday, the GBP fell back against some currencies yesterday on the back of a higher than expected unemployment figure (5% against an expected 4.9%). The news puts further pressure on the PM Keir Starmer amidst continued political uncertainty, but this morning has seen a better than expected CPI figure (2.8% against 3%). Whilst this will likely be negative for the GBP in the short term as it reduces the chance of rate hikes, in the longer term it could help to stabilize concerns around the UK economy and encourage money to flow back into the country in the long term. We have seen gilt yields gap lower this morning after the news, further supporting this narrative.

The AUD continued its recent struggles yesterday, falling back again against most currencies. It continues to be hit by falls in precious metals, as well as the broader move away from risk-on assets. The fundamentals do still support the AUD long term, but for the time being capital is moving away from the AUD and into less risky assets. CAD, on the other hand, is continuing to receive support from elevated oil prices, gaining ground against all but the USD. As stated previously, the fortunes of the CAD will continue to follow the price of oil for the near future. Until the geopolitical instability is removed and oil returns to its normal levels, CAD will continue to be an oil price proxy in currency markets.

Indices

Yesterday was another negative day for indices, marking the third consecutive negative day for the Nasdaq and a current fall of 3% from all-time highs. The elevated yields in the US are affecting the demand for stocks, as investors are able to get similar returns from far safer assets at present. Tech stocks are being particularly affected, as their value lies primarily on future rather than current earnings. When investors are facing an uncertain geopolitical equation and are being offered attractive yields in safe government bonds, the appeal of a stock that might benefit you in the future is reduced.

We see two key earnings releases today in Target and Nvidia, with Nvidia by far the most impactful. There has been so much hype and optimism around the microchip and AI sectors that anything but a strong beat will cause concern in the market. A positive release will reignite the optimism around the markets and push indices back to all-time highs, while a bad release or concerning guidance will play into what looks like it could be the beginning of the long-expected pullback. This is, along with news from Iran, the key piece of news for the day and possibly the week.

Precious Metals

Gold and silver continue to struggle under the weight of the rate-hike potential in the US. The energy shock and inflation issues mean precious metals are not acting as safe-haven assets, with demand being further reduced by heightened bond yields providing a competing safe-haven option that is a yielding asset. Gold has seemingly broken through the $4,500 level, meaning unless we see a change in the geopolitical landscape, there are now no significant levels to stop gold from falling further. Silver is still hovering above $70, but unless we see changes, it is likely to follow gold and stay under pressure for the foreseeable future.

Today's Market Drivers

• Nvidia Earnings - This will have a huge effect on the tech stock sector and on indices in general, an absolutely key data point to be aware of.

• Iran - Any news from the region, as always, will be hugely significant and will be pored over by all parts of the financial markets.

• UK CPI Fallout - It will be interesting to see whether the lower-than-expected figure this morning will hurt GBP due to lower rate-hike expectations, or help the GBP thanks to some renewed faith in the health of the economy.