22nd September - Green Shoots For Diplomacy
Yesterday was very much a risk-on day, with oil falling and news from the Middle East. The UN General Assembly is due to take place in New York this week, where world leaders are due to meet. Trump was asked and responded to Fox News that he would 'probably' be open to sitting down with the Iranian President over the course of the week, which is the first sign of a potential resumption in peace talks for a long time. This adds on to the expected meeting between Gulf State leaders over the course of the week. Of course, what Trump says and what Trump does can be two very different things, but this is the first time in a long time where the idea has not been dismissed outright.
Markets reacted to this, with Brent falling 3.6% to $100.60 per barrel and US Oil falling 5.07% to $91.60. Yesterday was the 4th straight day of oil prices falling, which was helped by further reports of an increasing number of barrels that the Saudis have been able to get out of the region over the weekend.
An important thing to note is that while the price of crude oil is falling, the price of diesel fuel is still extremely high. The national average per gallon in the US is close to double the price of just a year ago. If crude prices continue to fall, this will reduce the cost of gasoline and diesel, but this is a lagging effect, and so the benefits will not be seen at the pump for a little while yet. This has a direct impact on inflation expectations and the Fed's rate hike plans for the remainder of the year. The committee will not just be looking at oil prices but will also be looking at how quickly the price at the pump comes down and its knock-on effect on the rest of the economy.
Forex
Considering yesterday was a risk-on day, the USD held up comparably well, with the DXY gaining on the day to move up to 100.400 and breaking a streak of 2 days where the index slid ever so slightly lower. It is possible, however, that this was caused more by other currencies' weakness rather than USD strength as such, as we saw weakness in the EUR, JPY, and CAD among others.
The weakness in the Euro was a little unexpected, as lower oil prices should be positive for the energy-dependent Eurozone. It may be that the area is still suffering a little from the increase in the rate gap between the US and EU. It could also be due to capital looking to invest in Europe instead moving to the CHF, which had a very positive day by comparison. Normally, on a risk-on day, the CHF would suffer, but it seems within Europe there is still some safe-haven demand to go around, and this is being broadly placed into the Swiss Franc.
Outside of Europe, the big loser on the day was the CAD, affected as expected by the falling oil prices. The CAD has been tied very closely to oil since the beginning of the Iran War, with this relationship due to continue to affect the CAD for some time yet. The AUD has continued to show strength over the past week or so, while the NZD has shown weakness over the same period. Both currencies tend to move together and are both linked to precious metals, but after the RBNZ's recent dovish stance, it seems any antipodean demand has flowed predominantly into the AUD. There is a strong chance this continues until either the RBA becomes more dovish or the RBNZ becomes more hawkish.
Indices
Yesterday was a bumper day for growth stocks and the stock market in general - the Dow rose 0.7%, the S&P rose 1.4%, whilst the NAS100 rose 2.85%, the market's best day since the beginning of August. This seemed to have been driven by a jump in a number of tech stocks. We saw Meta jump 11% on early signs of success for its AI agent, AMD rose 10%, and Intel also rose 12% on the day. Both chips and software stocks rose on the same day, a rare event recently, as the market took in lowering oil prices and the expected meeting between Trump and Xi after the UN summit this week, plus an AI leaders dinner on the say day.
An interesting point to note on the day, it was reported yesterday that the tech sector's forward P/E has fallen from 32 times last October to around 21 times — roughly where it stood when ChatGPT launched in November 2022. This has happened while the NAS100 has gained 17% in that same time. The implication here is that earnings have outpaced the rate of price growth for the sector, rather than prices falling. The AI bubble thesis that we had discussed in the past was arguing that the P/E ratio was not sustainable, that we would need some form of price correction to get back to a healthier ratio. Instead, however, we have seen prices move slower than earnings, which could potentially perform the same job as a price correction in taking some of the air out of the AI bubble. There is still some way to go, but it is worth keeping an eye on this if we do not see a market fall in the near future. The bubble may be quietly deflating itself in the background while everyone is focused on the price alone.
Precious Metals
Yesterday was a broadly risk-on day, which is normally a negative for metals. I also argued yesterday that diplomacy could be a slightly negative factor for metals. Over the course of just one day, it is difficult to parse whether this idea has been proven correct, but it is worth noting that on a day when oil fell and there were green shoots between Iran and the US, metals were lower. Gold fell 0.92% to $4,350, while silver fell 0.38% to $66.10.
I will be keenly watching the metals over the course of this week as we wait to see updates from the UN summit. Will metals move higher on news of peace that will hopefully reduce the price of oil, or will metals move lower on the removal of safe haven demand that a peace deal will bring? Either way, it will be fascinating to watch.
Today's Market Drivers
Talks at the UN General Assembly - With no market data releases today, all eyes will be on New York and any news that may come from the meetings surrounding the summit.
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