22nd July - A 10-Day Truce On The Table
Yesterday, we saw concrete reports that mediators are working on bringing the US and Iran back to the negotiating table, under a 10-day truce aimed at securing shipping routes through the Strait of Hormuz. These were more concrete reports than before and gave markets hope for a cessation of hostilities soon. This was reported amid the backdrop of an 11th straight night of US airstrikes in Iran, further increasing oil prices, with Brent up 2% yesterday to $88.85 and US oil up 2.6% to $84.50. This meant the markets were forced to decide between reacting to higher oil prices now or the potential of a ceasefire and lower oil prices later.
Forex
The USD had another good day yesterday, seemingly reacting to the continued escalation and the increased price of oil as opposed to the talks of a potential ceasefire. The most interesting USD pair, as has been the case for some time, is the USD/JPY. I had flagged this pair in the past as it was at a level where the risk of BoJ intervention is real, but we had not really seen any movement over the past week or so. That was until yesterday, when the pair broke through its recent level of resistance and is now over 163.000, a level we have not seen since 1986. The Japanese economy continues to struggle under the rising price of oil, which combined with the USD strength yesterday was enough to break the resistance level around 162.500. The BoJ now must decide whether to let the pair continue long, in line with the fundamentals affecting the market, or to intervene once again. This will be a key pair to keep an eye on over the next few days, as if the BoJ wants to continue its stance of defending the JPY against the USD around recent key levels, it has very little time left to act.
The AUD and NZD made some gains on all currencies except the USD, where the NZD fell slightly. Both were still backed by the factors mentioned in yesterday's blog, but neither had the momentum to outperform the USD. It is worth noting that the NZD saw a slightly higher CPI figure than expected in the early hours of Tuesday (1.5% against an expected 1.4%), which helped the currency initially. NZD then fell back during the day to leave the CPI print having no real significant impact overall. This is an interesting thing to note, as normally a hotter print would help the currency, even if it is just a small change from the expected figure. It would seem when it comes to inflation, that markets are well and truly focused on next month's prints, as the prints released now show data when oil was much lower, in a world that no longer exists.
The GBP struggled a little yesterday in the aftermath of new PM Andy Burnham's cabinet announcement, despite some strong employment data released yesterday morning. Today we will see the GBP CPI figures from June. Considering the response the NZD saw to its own CPI release, it will be very interesting to see how the GBP reacts if the number is above or below expectations.
The EUR was steady on the day, whilst the CHF also had a relatively uneventful day. The CAD was also relatively flat on the day, with the benefit of rising oil prices being offset by new tariffs implemented on Canada by the US at the start of the week. The rest of the week could be interesting for the CAD, to see which of these factors will end up more impactful on the currency overall.
Indices
All three of the major US indices had a positive day yesterday, as markets reacted to the news of a potential ceasefire. The Dow rose 0.6%, the S&P rose 0.77%, whilst the Nasdaq 100 rose 1.73% to significantly outperform both as it bounced off a significant recent level of resistance at 28,500. The semiconductor stocks were the ones that drove the move, with Micron up 12%, Sandisk up 14%, and AMD up 8% on the day thanks to South Korean export data showing strong AI demand. This is a genuine challenge to the balloon deflation theory I have spoken about in the past, as this was based on excessive AI spending outweighing AI demand and not bringing a return on investment in the short term. One thing to note is that the biggest winners yesterday were ones that were oversold before the day, so this could easily have just been a bounce rather than a longer-term move.
The real test will be after market close today, when we will see Alphabet and Tesla both release their earnings. We will then have Intel do the same tomorrow, so by Friday we will have more important data to assess whether the AI/tech sector will continue to contract back to a more healthy level, or whether we will see more optimism and a push back towards highs for the more tech-sensitive indexes. The rest of this week will go a long way in telling us how the markets will look a month from now.
Precious Metals
One of the big stories of the day was a strong move higher in precious metals, as the markets chose to ignore higher oil prices and gain ground on the ceasefire rumours. Gold rose 1.75% up to $4,077, while Silver rose 4.27% up to $58.80, with both already up around 1% this morning as the move continues. Gold has also broken through a trend line that it has been respecting for the past 2 months, as the $4,000 continued to be a strong level of support for the metal.
The metals are seeing the ceasefire talks as leading to the potential end of the conflict and a return to lower oil prices, which would, of course, then mean inflation concerns ease and the FOMC can consider rate cuts again in the long term. I do worry, however, that this move may be a little ahead of itself, as nothing has yet been agreed. If we do see news of an agreed ceasefire, that would be good news for metals, but even then the trickle-down to lower inflation and so lower interest rates will be a slow process. Markets are still pricing a 60% chance of a rate hike in September, with the US 10y yields up to 4.63% at present, so yesterday's move is very much based on hope rather than data.
I am by no means discounting that this could be the turning point for metals, as if we do see a ceasefire, metals could see some strong support. I would caution, however, against jumping into long positions until we have seen more concrete evidence that the tide has turned and new highs are being formed. The key level of $4,200 is a good base to look at; if Gold can break this level, then we may see a longer move higher. This is all dependent, though, on a ceasefire being announced and oil prices falling back to pre-war levels; there are too many ifs today to have confidence in a long trade.
Today's Market Drivers
GBP CPI Release, 7am UK time - Another CPI release that will have an effect on the currency. The interest will be in how much it affects the GBP and how much markets are looking to next month's prints already.
Alphabet & Tesla Data Release - After the market close, we will see these two behemoths release their data. We will see how the market reacts and whether anything apart from blowout results will cause a fall in the stock prices for these companies.
Iran - Any news on the 10-day truce would be market-moving and will be one the markets will be keenly following.
Next Week's FOMC Decision (Wed 29th July) - This will be an enormous day for markets. We may see investors start to position themselves as far ahead as this week in advance of the event.
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