25th August - "Operation Economic Outcast"
Yesterday's main news was from Treasury Secretary Scott Bessent, who formally announced "Operation Economic Outcast" against Iran. This was a sweeping expansion of sanctions against Iran, designed to cut off any economic lifelines to the country from the outside world. The key part was the fact that sanctions extend not just to Iran, but to any country doing business with Iran. Bessent announced any country doing so will be "removed from the US dollar system".
This part of the announcement was significant, far more than announcements of sanctions on an already sanctioned Iran. China is the primary buyer of Iranian oil, so this announcement will put a further strain on the already strained US-China relations. Iran has responded to these sanctions by stating they had been expecting them for a long time, and had a 2-year plan to deal with them. Iran also said that both China and Russia had not accepted the sanctions, meaning we may well come to a situation sooner rather than later when China continues to buy Iranian oil and the US has to decide whether it will go ahead with its threat. For those who put weight behind the TACO trade concept (Trump Always Chickens Out), this could be a very interesting situation to follow.
Oil fell slightly on the day yesterday, but is still sitting at $93 for Brent Crude Oil and $84.50 for US Oil. Iran reiterated its warnings yesterday to any ship trying to cross the Strait of Hormuz, meaning these prices are unlikely to fall significantly over the next few weeks.
The other major news on the day was the breakdown in trade talks between the USA and Canada, with the US announcing it will implement tariffs and Canada confirming it will implement reciprocal tariffs in reply. How this will affect both currencies is yet to be seen, as we wait to find out if these are negotiating tactics or a genuine breakdown in the relationship between two traditionally close trading partners.
Forex
Yesterday was another day in the forex world where not a lot happened. The USD gained a little ground, and the CHF was weak, as the sudden move off the back of the US bond announcement last week continued to be retraced. There were no significant short-term moves, and so not a lot to analyse and report on. Markets may be waiting for the big news events to come this week, with the US PCE figure and Nvidia earnings release both due tomorrow, as well as the potential that investors are keeping their capital dry to wait for more information on how Operation Economic Outcast will play out. In the short term, it could be strong for the USD as the weaponization of the dollar reinforces its importance to the global economy. Long term, as in over the next number of years, if it forces other countries to look for alternatives, it could be a significant headwind for the USD.
Indices
The Dow closed up 0.3%, having at one point been down 0.3% on the day, while the S&P was down 0.25% from open to close, and the Nasdaq 100 was down 0.95%. The fall was due to the semiconductor sector struggling on the day, after Bloomberg reported over the weekend that Nvidia would be raising prices by 15% on servers using Vera Rubin and Blackwell chips. This hit memory names such as Sandisk and Micron the hardest, as well as Nvidia itself ahead of tomorrow's hugely important earnings release. Tomorrow's release will be a huge event and will continue to help us decide which way the market is moving. Will we continue to see price falls on anything but perfect earnings? Will the trend of capital movement from growth to value continue? What would a negative earnings release do to the indices as a whole? It is one to watch very closely.
Precious Metals
For the first time in a long time, we saw a divergence between Gold and Silver, as Gold rose on the day by 0.9% to $4,650 but Silver was completely flat. Both metals are down this morning so far, with Silver now down 3% from its peak at the end of last week. It is worth noting that Silver has now reached or been close to $70 and failed 3 times when you include today, a sign that the $70 mark is a significant hurdle for Silver to overcome.
Whilst this is only a small retracement and is similar to the retracement we saw at the start of last week, it is something to keep an eye on as we go into tomorrow's PCE release. A hot PCE will give the Fed more incentive to hike rates and will dampen the appeal of the metals.
The divergence between the two metals is an interesting one to note, as for the past 2 weeks we have seen Silver outperform Gold. The suggestion from this is that the speculative, higher beta asset in Silver is losing some of its demand even as Gold continues to rise. This could be nothing, but it could also be an early sign that there is a retracement in the near future for the metals. As I have said on a number of occasions, the fundamentals in the market mean that in the long term metals should perform well, but in the short term there is always the potential for retracements. As someone who wants to see a retracement to allow me to enter the trade, I am hopeful we may see some form of retracement this week before the market continues to move up without me.
Today's Market Drivers
US CB Consumer Confidence, 3 pm UK time - Not a market mover, but another news release that will help us get a picture of the health of the US economy ahead of tomorrow's PCE release.
AUD CPI, 2:30 am overnight tonight UK time - A significant event for the AUD, this could also give us some insight into the more impactful US PCE release tomorrow. A hot print could indicate that energy prices are filtering through to inflation figures around the world.
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