8th July - Tensions Flare Once Again
- Jul 8
- 4 min read
Yesterday saw tensions flare once again between Iran and the US. Both Qatar and Saudi Arabia accused the Iranians of targeting and striking oil tankers trying to transit the Strait of Hormuz, with 3 tankers in total supposedly being attacked. In response, the US revoked the 60-day license permitting oil sales that was issued only a fortnight ago, then on Tuesday evening the US announced that it had begun a "series of powerful strikes" against Iran in retaliation. The threat level for ships crossing the Strait has been upgraded by the naval coalition to "severe".
Oil jumped on the news, with Brent up 9% from lows to $77 this morning and US Oil up 8.4% from lows to just short of $73. US treasury yields have also spiked on the news, with the expectation that this will damage the disinflation story that has been gathering pace over the last few weeks.
Forex
The USD jumped on the news of fresh conflict around the Strait of Hormuz and rising oil prices, with the DXY returning above 101.000. US Treasury yields rose sharply on the day, with both the 2-year and 10-year showing significant movement upwards on fears of inflation spikes. If this oil price rise is sustained (which is by no means guaranteed), it is worth noting that the inflation it will cause will not be reflected until July's numbers are released in mid-August. The CPI due to be released next week will not factor this in. As a result, a longer-term spike in oil prices could take some of the importance away from next week's CPI as investors will already be looking towards the next release. It could mean that a softer print, while still being a market mover, will have less of an effect than it otherwise would have.
The USD/JPY continues to be one to monitor this week, as it continues its rise back to where the BoJ intervened last week. It is not there yet, but remains one to watch if USD continues to receive a bid on the back of higher oil prices and safe-haven demand.
The CAD saw a strong bid yesterday, backed by rising oil prices and showing that the correlation between CAD and oil prices is still strong. The AUD and NZD, on the other hand, suffered yesterday, affected by both a reduction in precious metal prices and the risk-off attitude due to the escalations. GBP remained steady on the day, while the EUR was also steady as market focus was towards both next week's CPI print and the escalations between Iran and the US.
This morning, NZD has seen a strong bid, as interest rates were raised to 2.5% overnight by the RBNZ. The price rise was expected, but not guaranteed, and so not fully priced into the market. The decision was driven by consensus, so no vote was needed, and there was no hawkish commentary to go with the decision. There has been a spike on the news itself, but this does not look to be like last month's event where there was a huge spike entirely due to hawkish forward guidance. I would expect the NZD to feel the effect of the hike this morning but will return to being under pressure against the USD over the next few weeks.
Indices
Yesterday was a negative day for indices as a whole, with almost all major indices seeing a fall in some fashion. The Dow broke a 7-day winning streak to fall 0.4% on the day, the S&P fell 0.6%, and the Nasdaq fell 1.8%. A number of chip stocks struggled, but one of note was Samsung, which fell by 8%. This was despite a strong data release yesterday that recorded record profits, but as it did not match the most optimistic expectations, the stock sold off. This is a pattern with AI and tech at the moment; unless the results are truly exceptional, the expectations are so high that markets are almost always disappointed. The fact that record profits are not enough is yet another warning sign that we are coming to the end of the AI boom.
Yesterday was the first day that SpaceX was part of the Nasdaq index, with SpaceX then promptly falling close to 7% on the day to continue its recent selloff. This is yet another data point backing up the euphoria-to-exhaustion narrative.
However, the rotation into value theory is continuing to hold its ground, as Bloomberg noted that despite the tech weakness, most S&P companies rose, implying that capital is continuing to move from tech to established companies and capital is continuing to rotate from growth to value.
Precious Metals
Gold & Silver struggled yesterday to truly end their recent good run, as the strikes in the Middle East escalated inflation fears. We are back to the 'worst-of-both-worlds' scenario that had seen metals fall over the last few months - metals will lose demand thanks to the expectation of higher rates if oil rises, but do not gain any safe-haven demand from the conflict as capital is instead moving into the USD.
Metals will now be looking to see how long tensions stay heightened. If we see the escalation extend beyond the end of the week, we could see metals suffer significant drops over the coming weeks. Metals were already under pressure from higher interest rate expectations. Before yesterday, I had mentioned that metals will struggle until we hear concrete news that central banks have ended a rate hike cycle and are moving towards rate cuts. This news just exacerbates the situation and means metals are likely to be lower for longer. It would be an idea, once we have passed a potential shock from next week's CPI, to be looking to position ourselves short in metals for the medium term at least.
Today's Key Market Drivers
Iran - The situation in the Middle East has leaped back to center stage. Any updates on the escalations will move markets; a re-closure of the Strait would be catastrophic.
FOMC Minutes, 7 PM UK time - The minutes from the first Warsh-chaired meeting, as he was so opaque with the press on the day of the meeting, there is a chance that we will see surprises in the minutes that could affect market expectations. It is worth looking out for unexpected language.
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