5th August - Hormuz Deal Close?
By far the largest story yesterday was the reports from both sides that a deal is close that will reopen the Strait of Hormuz to shipping. Also of note was the report that Iran is considering allowing European nations to remove mines from the waterway. US Treasury Secretary Bessent told US news that he thought the deal could be closed "either today or tomorrow," while Qatar's foreign ministry spokesman Majed al-Ansari framed the objective as getting "back to the normal situation." One important thing to note, however, is this is not a deal to end the hostilities, and Iran is even saying this is a deal with Oman and not with the USA. This is a big step in terms of its effect on oil prices, but it is not yet bringing an end to the conflict itself.
Oil dropped sharply yesterday on the news, with Brent falling 6.25% on the day and US Oil falling 5.5%. Brent is now just above $82 and looks set to return to pre-war levels over the next week or two should the momentum stay as it is. This has had an effect on all markets, with indices and precious metals booming yesterday on the news. We also saw a weak JOLTS jobs release yesterday, implying that we have a cooling labour market rather than a stronger one as implied in the ISM breakdown released on Monday. This further heightens the importance of the NFP report on Friday, which will confirm the health of the US labour market one way or the other.
Forex
The most significant moves yesterday were for the commodity currencies related to oil and precious metals, as the commodities were the most affected by the news of the day. AUD and NZD both saw significant support as precious metals gained a long-awaited bid, while CAD struggled on the day as oil prices fell rapidly. The reaction to the commodities' moves was exactly as expected for the three currencies and will continue to be the case for the short to medium term as oil prices and interest rates remain central to investors' thinking.
The USD gave back some of its gains from Monday, but was not as affected as could have been imagined. The DXY fell back below 100.000, but was still sitting at 99.900 at the close of the day. It looks as if the USD is stuck between the bearish JOLTS reports and lower oil costs, and the bullish ISM data from yesterday. Markets may be waiting for NFP to get a clearer picture before forming an opinion in either direction. This would also imply that the market still hasn't resolved whether high long-end yields are a growth signal or a distress signal — Friday's NFP remains the arbiter.
Indices
Yesterday was a hugely positive day for indices, as the weak jobs data combined with Hormuz reopening news gave boosts to the entire market. All three major indices were up significantly (Dow up 1.88%, S&P up 1.91%, and Nasdaq up 3.12%), with both the Dow Jones and S&P 500 making fresh all-time highs. Earnings from Palantir and Caterpillar helped, but the oil prices and deal optimism were the main drivers here. It is worth noting that around 70% of the NYSE saw gains yesterday, indicating this was a rising tide raising all boats scenario. Reduced oil prices give us hope for lower inflation, which combined with the weak labour figures gives the Fed less incentive to hike rates and more incentive to consider ending the rate-hike cycle early. Lower rates are almost always good for stocks, so the market has taken yesterday as a universally positive signal and acted accordingly.
How this affects the AI bubble is still to be seen. Tech was one of the leaders in yesterday's rally, but we have seen this before, only for tech to fall off a few days later and reverse those gains. We will need to see a longer-term view to ascertain whether the AI bubble is reinflating or staying where it is.
Precious Metals
Along with indices, metals are where yesterday's news could be really consequential. We have maintained for months now that metals are effectively rates instruments at the moment; very little other than the prospect of rate hikes or rate cuts is moving the market. This is what made yesterday so consequential, as we saw a combination of two news events that combined to reduce the likelihood of rate hikes. Metals reacted accordingly yesterday and have really moved this morning, with Silver up 2.5% yesterday and already up 3.5% this morning, and Gold performing just as well. Silver is currently sitting at $61.77 whilst Gold is at $4,186.
The real test will be whether the Strait of Hormuz agreement is finalised and whether it holds, then whether we see a soft NFP print at the end of the week. A combination of these two factors could be the catalyst metals need to push out of the ranges they are in and gain back some of the ground lost this year. Gold still needs to break through $4,200, Silver has already broken past $60 but now needs to maintain its level above this. If we see both metals are able to stay above these two key price points, then the negativity surrounding metals that we have seen for months may dissipate and we could be in for a return back to the levels they were at before the Iran war. The next week or so will be absolutely crucial.
Today's Key Market Drivers
Iran & the Hormuz deal - News on this will be market-moving either way; an announced deal will boost indices and metals, while a collapse in talks will push oil back up and risk-on assets down.
US ADP Employment (1:15 pm UK) and ISM Services (3 pm UK) - After the soft JOLTS, ADP builds or breaks the cooling-labour case. Services is the bigger economic read.
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