3rd June - Talks Grind On
- 2 days ago
- 4 min read
Geopolitics
Tuesday did not bring a breakthrough in talks, and the deal between the US and Iran remains in discussions. The main talking points remain the Strait of Hormuz and Iran's nuclear program, which have not changed since the beginning of the negotiations.
The markets are still reading this as a delay in getting the deal signed, rather than increased uncertainty that the deal may not be signed. This keeps the asymmetric risk between a deal and a breakdown the case; a move on a deal will be far smaller than a move on a breakdown, as a deal has already been largely priced in.
Oil rose again yesterday on a deal still not being reached, with Brent Crude back above $100 a barrel this morning. We are still facing the possibility of severe shortages in oil reserves, something a senior executive at commodity trading giant Vitol noted has not been fully recognized by US and European leaders. The concern is that if a deal is not reached soon, these reserves will run dry, which would lead to a real lack of supply and would send oil prices skyrocketing. The effects of this—soaring inflation, recession, and stagflation concerns—are significant and of real concern.
Forex
The USD had another positive day as concerns possibly creep in about the delays in a deal being reached, with the DXY moving towards 99.500 this morning. The key market to focus on remains the USD/JPY, with the pair now at 159.960 and on the verge of crossing 160.000. The Japanese Finance Minister Katayama has already said overnight that they are willing to act on forex if required, so we are now into the area where action may be taken. The risk/reward of a short trade with managed stops above 161.000 remains a potentially lucrative trade today. It is worth continuing to monitor the noises coming out of Japan to gauge whether there is any change in sentiment, but the likelihood remains that an intervention is imminent if we close above 160.000 today.
The GBP and EUR both had mixed days, with any movement in their respective baskets seeming to be centered around the currency they are paired with. The EUR still remains likely to be supported by ECB rate hikes, which is also becoming increasingly likely in the UK as well. While the political uncertainty surrounding Prime Minister Starmer has not disappeared, the situation has cooled recently, and it now seems more likely than not that he will stay in power for the foreseeable future.
The CHF continued to lose ground yesterday as risk-off trades are unwound. Interestingly, it seems if there is any risk-on demand flowing into markets from the delays in a deal, they are flowing into the USD as opposed to the CHF. It will be interesting to monitor if this remains the case if we continue to see no deal being agreed.
In terms of commodity currencies, CAD saw a little support from the rise in oil prices, while AUD also saw support from rising precious metal prices. The AUD in particular outperformed the commodities it is normally linked to yesterday, thanks in part to the risk-on tone of the day and the continuing rate differential support. However, this morning we have seen Australian GDP figures released for the quarter that were lower than expected (0.3% as opposed to 0.5%). This undermines any further potential rate hikes and will be a weight on the AUD over the coming days. The AUD/USD pair is currently sitting at a key level of support; it will be interesting to see whether the GDP news will be enough to push through this or if we will see further support for the AUD push past the GDP news.
Indices
Indices continued their run upwards with another day of record end-of-day figures for the Dow Jones, S&P 500, and Nasdaq, while the Nikkei has made fresh all-time highs this morning.
The markets continue to ride the AI/tech boom, led by companies such as Apple (+2.9%) and Cisco Systems (+5.5%) yesterday. There were some companies that struggled yesterday, however, with Alphabet, Microsoft, and Salesforce all falling in the region of 4% on the day. The implication continues to be that the indices are reliant on a narrow band of companies to support any growth, with capital moving between mega-tech stocks rather than into the market as a whole.
The market also seems to be broadly ignoring the continued delays with negotiations in Iran and the increasing oil prices; the optimism trade that all will be OK continues to be driving the market. The warning remains the same: markets currently have limited short-term upside on a deal being reached and significant downside on talks breaking down.
Precious Metals
Gold and Silver remain in the same situation as has been previously noted, under pressure from both the removal of safe haven demand as the markets move to a more risk-on stance, and pressure from rate hike expectations surrounding inflation concerns. There was no significant move of note yesterday in either market; both gained ground during the day (1.2% for Gold and 2.5% for Silver) before closing close to level on the day.
The forward guidance also remains the same. We would need to see a significant easing in inflation concerns to remove the rate-hike pressure on the metals, which recent data such as the JOLTS Job Openings from the US yesterday did not provide. Until we see inflation concerns ease, the path of least resistance for both is to go lower for the short to medium term.
Todays Key Market Drivers
Iran - As has been the case for months now, this will be the key market driver. Anything unexpected will move the markets significantly.
USD ADP Non-Farm Employment Change, 1:15 pm UK time - This will give us another indication of the US economy's health and will provide guidance to the FOMC on how it should assess interest rates going forward. Consider this the precursor to the more important NFP numbers on Friday.
USD ISM Services PMI - Another good indicator of the economy's health, this time from the perspective of companies themselves. This will also be factored into any interest rate decisions.
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