21st September - Oil Falls But Uncertainty Remains
The weekend continued to bring escalation between the Houthis and the Saudis, as the Houthis claimed to have targeted 'sensitive' sites in Riyadh, with Saudi Arabia issuing air-raid alerts in the capital for the first time since April, as well as targeting an Aramco facility in Yanbu. US citizens are now also being advised to 'seriously reconsider' travel to the region. Separate from this, the Iranians have reasserted their stance that the Strait of Hormuz will not be reopened until all of Tehran's conditions are met. Trump is set to meet Gulf state leaders this week, so there is some faint hope that discussions between the US and Iran could resume at some point.
Despite this, we have seen reports over the weekend that the physical flow of oil from the region actually increased in September compared to August so far, with the US Treasury claiming that up to 17 million barrels per day were transited through the Strait on some days, just 6 million below the 2025 average. This has meant oil prices have continued to drop, with Friday being the third consecutive day of falls.
This has created an interesting juxtaposition; we have oil prices falling thanks to increased supply at the same time as we have Iran making claims about the strait remaining closed. The market at present seems to be reading the tanker data rather than the Iranian rhetoric, but it will be important to monitor this over the course of the week to see if anything changes.
US bond yields shot up on Friday, having fallen on Thursday in the aftermath of the Fed meeting. The 2y yield is now back near its recent highs, while the 10y and 30y both jumped back towards their respective recent highs without breaking past. This was likely due to the bond market pricing in another hike before the end of the year, along with continued uncertainty surrounding the Middle East. We still cannot discount the rises being due to capital moving away from the US economy, as we also saw a weaker USD on Friday. Rising yields would normally boost USD demand, so seeing one rise and the other fall is something that should be taken note of.
Forex
The DXY saw a spike higher to begin Friday, before falling back to be even on the day overall. This may have been in part due to a large move in the USD/JPY, as the pair rose as high as 158.000 before falling back down to 156.800 before the end of the day. There did not seem to be an explicit catalyst, but there is also no evidence as of yet that this was intervention from the BoJ or US Treasury, so this could have just been positioning before the weekend or some louder than normal noise in the market.
This week will be very interesting to see whether the USD continues with the strength it showed last week, or whether the post-Fed market will see a reversal and the USD continues south. For me, there is a chance that we continue to see some muted USD strength this week, as there is currently no catalyst to push the other way. We do not have any major data releases this week, so unless we see developments in the Middle East (which, considering Trump is meeting Gulf leaders, is very possible), I would say it is likely that the USD ends the week a little above where it currently sits today.
Outside of the USD, the EUR and GBP had relatively flat days, while the AUD and CHF seemed to have relatively strong days by comparison. AUD was boosted by higher precious metal prices, while it may be that the CHF is taking on some safe-haven demand as uncertainty in the Middle East continues. The CAD struggled as oil prices fell; the relationship between CAD and oil seems to still be running strong and will continue to do so for the foreseeable future, so it will be something to keep track of for any CAD traders this week.
Indices
Friday was a relatively quiet session, but one that continued the trend of the previous day and saw boosts for growth stocks. The Nasdaq closed 0.8% up on the day, the S&P was up 0.3%, while the Dow fell by 0.1%. This continued the theme from Thursday's price action, where the Fed seemingly putting a cap on interest rate hikes gave markets the confidence to invest in growth stocks, knowing the expected value of their eventual returns when compared to investing in much safer assets with lower returns.
Once again, this week will be very interesting to see how the markets develop in the absence of any key data releases skewing the movements. This week could be an excellent gauge of how capital is perceiving the markets. With no distractions to affect momentum, we will see whether investors are truly regaining confidence in growth stocks or whether this was a temporary reaction to the Fed.
Precious Metals
Metals rose on Friday to continue their Thursday momentum, with gold up 0.8% and silver up 1.5%. Both were up even higher intraday, but fell back in the afternoon in a similar fashion to the DXY.
What would interest me this week is whether we do see some form of diplomacy develop between the US and Iran, and how this would affect metals prices. For the majority of the Iran war, metals have been struggling and were boosted whenever there were peace talks and the potential for an end to the conflict. At that time, they were at the mercy of the rate-hike channel and had no safe-haven demand to fall back on to balance out the rate-hike demand pressure. However, today this seems to have changed somewhat, with the Fed putting a ceiling on interest rates there is less uncertainty around this, which could dampen the effect of the rate-hike channel on metals. On top of this, the USD seems to have lost some of its safe-haven demand and metals seem to have gained back some of this. This means that, in contrast to the earlier stages of the Iran War, peace negotiations could actually be slightly negative for metals as they lose some safe-haven demand but do not see relief from an eased rate-hike channel. If we do see movement towards peace, the metals markets will be the ones I am watching the most closely.
This Week's Market Drivers
AUD Employment Change, Thursday 24th Sep - A key metric for the AUD labour market and an indicator of the Australian economy's current strength.
CHF SNB Rate Decision, Thursday 24th Sep - Expected to hold at 0%; as always, forward guidance from the central bank will be key.
Developments in the Middle East - With no major US news releases this week, all eyes will be on Iran and whether there is any movement in the geopolitical situation across the entire Middle East.
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