6th May - TACO Or Breakthrough?

Forex

The most important news overnight was the announcement from Trump that 'Project Freedom' has been paused to see whether an agreement can be reached with Iran. The US naval blockade is still in place, but Secretary of State Marco Rubio has advised the active military phase is now over. The US is now in a defensive position and will not shoot unless shot at first. Iran, on the other hand, was defiant but did not escalate, while their Minister of Foreign Affairs Abbas Araghchi flew to Beijing in the hope of getting China's help in brokering a deal favorable to Iran.

The question that remains is whether the pause in Project Freedom was another example of Trump blinking first or if it was because meaningful diplomatic progress has been made behind the scenes. The blockade is still in place and the Strait of Hormuz is still closed, so it may be that only time will tell whether this was a signal of progress or a sign of US weakness.

The markets took the news as broadly risk-on, with the USD falling on the development and oil also moving lower. The DXY gave back all of its gains since the start of the week thanks to the reduction in safe-haven demand, meaning EUR/USD and GBP/USD both gained ground. If we see further good news, this will only continue as money flows out of the USD into more risk-on assets.

Oil fell significantly, with Brent Crude dropping from highs of $120 back to $112 this morning. This has had a significant effect on a number of currencies, none more so than the JPY. Coupled with whispers of further BoJ intervention, the Yen basket saw significant backing, and the USD/JPY fell more than 1% in the space of an hour. There are still concerns, however, that the fundamental picture puts downward pressure on the JPY. The feeling is that BoJ interventions and oil price falls could put a cap on the price rather than be an incentive for a sustained move lower.

In terms of commodity currencies, the CAD saw a mixed reception overnight. The oil-producing country is currently caught between the benefits of a more risk-on environment and the dampening effects from lower oil prices. Meanwhile, the AUD experienced a strong increase overnight, driven by the country's fundamentals and the hawkish stance from the RBA, along with a risk-on boost, resulting in the AUD/USD rising by nearly 1% for the day.

If we do not hear significant updates from Iran over the next few days, we could see these trends continue for the remainder of the week as markets once again ride a risk-on wave. It is important to be aware, however, that the situation can change in minutes; bad news or re-escalation in the region will throw markets away from risk-on currencies just as fast as they are backed. For the time being, caution is still very important, and risks need to be managed very carefully.

Indices

It was yet another blockbuster day for the US indices. AMD reported excellent earnings figures that reinforced the AI trade is still very much intact. The S&P and Nasdaq yet again reached all-time highs, whilst the Dow also rose on the day. This, combined with the geopolitical news, was enough to further boost the market's optimism and risk-on stance in stocks. We also saw a new all-time high in the Nikkei, helped by both the weak Yen and the trickle-down effect of the AI wave. The FTSE100 in the UK had been struggling over the past few weeks but was also showing signs of life, currently up 0.75% on the day thanks to the risk-on moves.

I am still hesitant to be fully behind the move in the tech-heavy S&P and Nasdaq. There is a wave of optimism around the AI-centered mega-companies and a possible resolution to the Middle East conflict that may be over-exaggerated. I do not think we will see a fall as dramatic as the Dot Com bubble or the 2008 recession, but I would not at all be surprised to see what would be a healthy retracement at some point in the near future. A possible fallback to previous all-time highs could be enough to let the market breathe and encourage further rises in the longer term.

Precious Metals

Both Gold and Silver saw backing after the news from the US and Iran, with Gold already up 2.5% on the day as of this morning. Both were suffering from the inflationary pressures of higher oil on the USD. If oil prices fall and there is less need for the Fed to hike rates to combat inflation, then the non-yielding metals will look more attractive in comparison. The fact that the conflict has not fully resolved also means that there is some safe-haven demand that remains, something that is normally a boon for both metals. Both will be heavily dependent on news from the Middle East; more positive news would see both continue to regain ground, whilst any escalation will see them fall further. The high-beta character of Silver will see its swings be more extreme, something that will need to be factored in for any trades that are to be made.

Today's Market Drivers

• ADP Employment - This is an important preview for Friday's NFP, which will be the key economic news event for the week. Today's release may not move the market significantly, but it may give clues as to what we can expect on Friday.

• Iran & Project Freedom - This will still be the main driver for the currency and precious metals markets. Iran's response to the news overnight and any agreement they may come to with China will have significant effects on the path the markets will take.

• Disney & Uber Earnings - Both sets of earnings will be released after the bell, so will not affect today but could affect overnight moves. These are both good indicators for how the market is performing outside of the AI bubble and will give good reads on how the Iran conflict is affecting consumers.