27th July - A Pause In Strikes
In terms of geopolitics, the weekend brought the first sign of a de-escalation in over two weeks. For the first time in fourteen days, the US did not announce any new strikes on Iran, with the campaign now described as being "on hold" while talks over the future of the Strait of Hormuz take place. This morning that pause has been made official, and markets have reacted accordingly. The push seems to have come from a fresh round of mediation led by Pakistan and reportedly backed by China, which has revived the diplomatic route after it stalled following the death of the US service members earlier this month. It is worth stressing that this is a pause and not a resolution, and the Houthis were still active over the weekend with attacks on Aramco facilities in Saudi Arabia, so the situation remains fragile. But after two weeks of relentless escalation, this is the first step in the other direction.
The effect on oil has been immediate and significant. Brent fell over 8% since Friday's close, currently sitting around $90.60, having already fallen almost 2% on Friday to close at $98.70. So in the space of three sessions we have seen oil fall from a high of $102 on Thursday to $90 this morning. This is the key development, as oil has been the transmission mechanism into everything else for the entire war. If this pause holds and oil continues to fall, then the whole chain we have been tracking begins to reverse, with lower oil leading to cooler inflation expectations, which in turn takes the pressure off the central banks. One thing to keep in mind is that the US Strategic Petroleum Reserve is now at its lowest level since 1983, so the physical cushion is thin, and any resumption of strikes would likely bite faster than before.
Forex
The US dollar has begun to give back some of the gains it made last week. As flagged on Friday, last week's dollar strength was built almost entirely on a safe-haven bid rather than on any supportive data, with NFP, CPI and PPI all coming in below expectations this month. That leaves the dollar exposed now that the safe-haven premium is unwinding, and it is exactly the asymmetric risk that was described, with limited upside but plenty of room to fall should the de-escalation continue. The DXY has eased back from the highs it reached on Friday, and if oil keeps falling and the truce holds, I would expect that weakness to extend.
The other majors have moved as you would expect on an easing of tensions. The EUR has recovered back above 1.1400, clawing back the losses it made on Thursday around the ECB decision, while the GBP remains a touch soft at 1.3337, still weighed down by the Healey appointment more than anything external. The USD/JPY has eased back to 163.500, backing away from its approach towards 164 as the risk-off tone has cooled, which will come as a small relief to the BoJ even if the underlying pressure on the pair has not changed. The commodity currencies have caught a bid as risk sentiment has improved, with the AUD pushing back above 0.7000 and the NZD steadying, both benefiting from the more positive mood.
Indices
Friday saw a mixed session as the market digested the oil moves and the ongoing tech earnings. The Dow rose 0.46% to 51,947, helped by a 3.5% jump in Apple, while the S&P 500 was essentially flat, up 0.05% to 7,411. The Nasdaq was the laggard once again, falling 0.64% to 24,975 as the concerns around AI capital spending continued to weigh on the megacap tech names. All three indices finished the week lower, with the Dow posting its third losing week in a row.
This morning, however, the mood has shifted, with futures jumping higher across the board on the back of the strike pause and the fall in oil. The lower oil price eases the inflation concern that has been hanging over the market, and the improved risk sentiment has lifted the whole complex. The big test now comes this week, as Microsoft, Meta and Apple all report their earnings. These are the largest AI spenders of them all, and they report straight after Alphabet was punished with a 7% fall for raising its capex guidance. If the market treats their spending in the same way, then the split we have been describing, where the market punishes the spenders and rewards the suppliers, gets its most important confirmation yet.
Precious Metals
The metals gapped higher this morning, continuing the recovery that began on Friday when gold rose 0.43% and silver gained 1.70% as yields eased alongside oil. Gold is now trading around $4,095 with silver near $59.70, both extending their gains as the falling oil price and the improved risk mood take some pressure off.
This is the moment we have been waiting for all year, at least in theory. The argument has always been that gold is trading as a pure rates instrument, and that the only thing that could truly unlock it would be a fall in oil that eases inflation and frees up the Fed. That is now potentially beginning to happen once again. However, I would urge caution before calling this a reversal. The metals are still very much within the range they have been stuck in, and one morning's gap higher on a fragile pause does not make a trend. We need to see a clean break of the key levels, $4,200 on gold and a convincing hold above $60 on silver, before I would be willing to say the tide has turned. Until then, this remains a bounce within a range, and as always, it is better to wait for the established trend to confirm itself than to try to pre-empt it. But for the first time in months, the catalyst I have been looking for is genuinely in motion, and that makes this week a very important one for the metals.
This Week's Market Drivers
Iran - The key market driver this week, markets will move significantly based on whether this is a temporary pause or a more permanent ceasefire.
US FOMC Decision - On Wednesday, we see the most consequential financial news event of the week, as the FOMC announces the updated US interest rate and gives forward guidance for the next month. Rates are expected to be held, but the guidance could be hugely significant. Unexpected hawkishness or dovishness will move markets as they did last month.
GBP Interest Rate Decision, Thursday - Similar to the US, the rate is expected to be held, so the real interest will be the guidance surrounding it and the vote split in coming to that decision.
BoJ Interest Rate Decision, Friday - As with the UK and US, rates are not expected to change, so forward guidance will be key.
Microsoft, Meta & Apple Earnings - Three of the mag-7, their earnings will continue to shape the balloon deflation story we have been covering and will tell us a lot about market sentiment right now.
AUD CPI, Wednesday - This will continue to show us how markets are reacting to inflation figures covering the period when oil was back to pre-war levels. Will this figure be largely ignored if it is not as expected as markets wait for next month's figures?
US GDP & PCE figures, Thursday - Key figures for the US interest rate picture next month, these may start to include data from the period when oil was back up around $100 and so may be far more market-moving than the previous month.
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