22nd May - Holding Pattern

Geopolitics

The biggest news of the day was the continued negotiations between the US and Iran, with comments from both sides affecting the market. From Iran, we received reports that a directive was issued from the Iranian Supreme Leader that enriched uranium must remain in the country, one of the USA's red lines that it has not yet been willing to cross. We also heard from Trump that he was prepared to wait a few days for Iran to come to the 'right answer', while also cautioning that there would be renewed attacks if a deal could not be reached.

The deal seems to be still on, as neither side has fully withdrawn, but there do still seem to be wrinkles that need to be sorted before a final deal can be agreed upon. Markets as a whole are reacting with cautious optimism; if the two sides are still talking, then a deal can still be reached.

Forex

The dollar saw some support during the day on the news from Iran, but then fell back to where it began on the news that negotiations were ongoing. The DXY remained just about level on the day overall, showing that the market is now waiting for something more concrete from the Middle East. This was the case for almost all of the US pairs, with the USD/JPY, EUR/USD, and GBP/USD all moving in the USD's favor before ending the day close to where it began. I would expect to see a similar situation today if we do not hear any further significant developments; if we do, then the same dynamic will play out that has been occurring since the start of the conflict—negative news will be good for the safe-haven USD, while positive news pushes the DXY lower.

The same can be said for almost all currencies yesterday, ending the day level after an initial reaction to the Iran news. The exception seemed to be the CAD, which struggled yesterday following the news that discussions are progressing. While oil did not move significantly yesterday, CAD seems to be pricing in the expectation of lower oil prices in the future, reinforcing the market's optimism that a deal will be reached. This raises an interesting question: if a deal is reached, will the market reaction be subdued as it is already priced in? On top of that, if a deal is not reached, will the market then overreact? It will be interesting to see how the CAD in particular reacts to news from Iran today to see whether it is ahead of itself or not.

Indices

Yesterday saw indices push higher across the board, encouraged by the expectation of a deal being made in Iran. All three of the major US indices rose, with the Dow being a particular beneficiary that is now trading just shy of its all-time high and comfortably over 50,000. The implication is that the market is expecting a resolution to be found and that it is willing to overlook minor setbacks along the way. We can expect to see further moves higher should we get closer to an agreement, but as with CAD, the move may be muted as it is possible the good news is already priced in.

In terms of earnings, Nvidia continues to be an interesting case study for the AI/tech sector. Despite positive earnings this week, the stock has traded flat since the news instead of moving higher. This seems to continue the trend of anything except huge earnings beats being considered normal and almost expected. Whilst the companies continue to overdeliver, this is not an issue, but as has been repeated a number of times, once we get less than expected results from one of the major players, we will then see a significant fall-off. The euphoria and optimism around the tech sector at present do seem overstretched, so maybe a reality check when it eventually comes will not be a bad thing in the long term.

Walmart's news was also interesting, with positive headline figures but interesting data below that. Discretionary retail demand is falling, but necessity-based demand is rising, showing that the US public seems to be moving away from luxuries and is prioritizing essentials. This is a sign that the economy may be beginning to slow; if oil remains heightened and inflation high, this could lead to a worst-case scenario of stagflation. It is worth looking out for this over the next few weeks and months to see if signs continue to point this way.

Precious Metals

Gold was another market that was flat on the day, again falling due to the news from Iran before recovering to finish level, while silver also saw a fall before closing the day slightly positive.

Both metals are still subject to the same forces - potential peace in Iran and lower oil prices reduce inflation, reduce the need for rate hikes, and support demand for non-yielding assets. At this point, the safe-haven demand we normally find with precious metals can be discounted almost entirely; until inflation concerns are assuaged, the rate hike concerns are by far the main driver. Once we do see oil prices drop, if global economies are struggling in the aftermath of the energy shock we have seen, there is a strong possibility that safe-haven demand will flood back into precious metals, so long term they could be a potential opportunity. Patience is needed in the meantime.

Today's Key Market Drivers

• Iran - It has been the case since the war began and will remain the case until it finishes; any updates from Iran will be the significant drivers for the day. There will not be anything that will get close to the influence it will have on markets.

• GBP & CAD Retail Sales - These should give us an idea as to the health of the respective economies moving forward.