9th June - Cautious De-Escalation
- 2 days ago
- 4 min read
Geopolitics
After a weekend of escalation, yesterday saw some calming and some moves in the opposite direction. Both Iran and Israel have confirmed they have stopped attacks on each other, but both have also warned of further and more intense strikes if the ceasefire is broken again. The whipsaw of escalation and de-escalation continues on as it has done since the ceasefire was originally agreed. It is likely to continue this way until a deal is eventually signed and the hostilities end for good. Unfortunately, this also means that markets will remain choppy until this is resolved, making it very difficult for shorter-term traders to judge the market as a tweet or missile strike can move the market at a moment's notice.
Forex
With the de-escalation tone, the markets faded the weekend's move slightly yesterday. The DXY fell back a little, meaning we saw some support for the EUR/USD and GBP/USD, though both the EUR and GBP still lack their own independent catalysts, so these two pairs are moving based on the USD itself.
The USD/JPY continues to hover around the 160.000 level, sitting this morning at 160.075. The decision remains for the BoJ if the price continues north, but it is worth noting that there may actually have already been a minor intervention on Friday last week. Upon the news of the higher NFP number, all USD pairs apart from the USD/JPY moved aggressively in the USD's favor, but this move was far less pronounced in USD/JPY. At the same time, we also saw support for the JPY in all of its other major pairs. We will not know for sure until the BoJ accounts are released and we can see for ourselves, but the implication of the market moves on the day is that the BoJ acted on the NFP news to restrict the impact it had on the USD/JPY pair. The pair is still elevated despite this, so further intervention may still be necessary in the near future. USD/JPY remains the one to watch for the day.
The EUR is seeing a little support thanks to the expected rate hike on Thursday by the ECB, but as this has been expected for a while, the rate hike has already largely been priced in. The GBP, on the other hand, does not really have anything significantly moving it either way, so its pairs are all moving based on the currency they are paired with at present.
As has been the case in the past few weeks, the commodity currencies have moved with the commodities, so there is not much analysis to be done. The AUD shored up a little as precious metals traded close to flat on the day, while the CAD lost some ground as Brent Crude fell in price slightly. This relationship is likely to continue for the foreseeable future, as at present there are not many other factors coming into play apart from the commodities themselves. Until the war is over, expect this to continue.
Indices
Monday was a correction to the weekend in indices, but interestingly it was led by chips and AI stocks as their selloff was temporarily halted. The S&P 500 rose 0.6%, the tech-heavy Nasdaq rose 1.9%, whilst the tech-light Dow was effectively flat on the day. All three saw a spike higher in the European session, before the Dow fell back to even and the S&P 500 lost half of its gains in the US session.
The initial analysis here is that one of two things has happened. One option is that the fall in markets on Friday was a temporary reaction to the NFP figures and that normal service is being resumed on Monday. For this to be the case, the markets would need to be correct in assuming the Iran conflict is close to a resolution and that rate hike fears will be dissipated by future economic data. This is then a dip buying opportunity before the markets head back to all-time highs.
The second option is that this is a temporary respite as some take profits and rearrange their positions, meaning we see a small bounce off of a previous level of support before we continue to move lower. In this scenario, we would then see markets continue falling for a more healthy correction, something I would argue is needed after such an extreme run since the start of the war.
Which one of these scenarios goes on to be the case will depend on both the situation in the Middle East and potentially the CPI print to be released tomorrow. I still feel markets have not fully priced in the extended effects on inflation that the higher-for-longer oil prices have had; once the war is over, prices will not move back to normal instantly, and we may need a rate hike cycle to get back to where we were. All eyes will therefore be on the CPI and PPI prints released this week as guidance for which market forces will win in the short term.
Precious Metals
As was the overall trend for the day, Gold and Silver consolidated their positions after a sharp fall on Friday, with both markets closing the day close to level with their opening prices. The rate-hike narrative continues to dominate the precious metals markets and continues to outweigh the safe-haven demand we would otherwise see. As with indices, this week's CPI and PPI prints will be key to guiding the precious metals markets' future moves. Hot numbers would see an increasing need for rate hikes and would be negative for Gold and Silver, while lower numbers would see rate hike concerns ease and would allow the safe-haven narrative to have more of an impact on these markets. Again, as with indices, these markets are in wait-and-see mode.
Today's Key Market Drivers
Iran - No more needs to be said with Iran; meaningful news either way will move the market. Rumours and minor updates will lead to more whipsaw action in markets.
News Events - There are no news events today, so all markets will be focused on Iran, as well as any rumours about what to expect with the blockbuster news event of the week in tomorrow's CPI print.
Comments