Bonds, perhaps the least understood of the classic asset classes, were thrust into focus earlier this week. Long-dated yields jumped after a government bond selloff. The moves were seen around the globe. The 30-year yield in the US jumped 6bp midweek to its highest level since 2007. UK long yields touched their highest level since 1998 last Friday. As in any financial market in the modern environment, algorithms carrying out systematic selling played their part in driving the corrections. At the core of the moves is the recent surge in expectations for inflation amid a settling in of the NACHO realisation. Other factors are concerns around excessive government spending, and the AI boom. The surge spurred a pullback in equity markets late last week; dips that have largely been recovered, albeit in a choppy fashion, throughout this week.
A report overnight from Al-Arabiya TV claimed that the final draft of an agreement between the US and Iran had been drawn up. Naturally markets responded with the moves with which we are now accustomed: in broad terms oil and USD down, stocks and metals up. Throughout the week, indeed since the conflict began, we have seen these moves and their inverse play out on the screens as the negotiations drag on, and surrounding sentiment sways from side to side.
But subsequent back and forth in the press between the two sides has left market participants and commentators split on the prospective reopening of the Strait of Hormuz. One key unresolved issue remains the uranium. The US has called for Iran to hand over its enriched uranium, and make commitments that it will not carry out any further enrichment for at least the next ten years. The other major sticking point is of course the reopening of the Strait, but in particular how it will function if and when it does reopen. Specifically, Trump and Secretary of State Marco Rubio have made it clear that they do not want to see any kind of toll system put in place by Iran and/or Oman.
Meanwhile the Strait remains closed to all but a trickle of ships and supply, and global oil stockpiles and supply buffers around the world continue to shrink. This weekend shapes as an important one in the Middle East conflict. We know that the US administration favours weekends for market-moving announcements and geopolitical shifts, and this weekend is a long one, with a resolution apparently close.
But if a deal is not reached, will DJT follow through on his numerous threats since the ceasefire began “to do some things that are a little bit nasty”? Officially, Tehran is still composing its response to a text message from Washington several weeks ago containing the 14-point proposal. And the Pakistani mediators are said to be stepping in once more. As always, watch crypto markets over the weekend as an early indicator of risk sentiment if announcements are made.
Nvidia released its quarterly results to the market this week, rounding out US earnings season. Despite beating analysts’ expectations, including a greatly increased dividend and $80 billion in stock repurchases, the stock ended the following session down around 2%. It is predicted that Nvidia’s revenue this year will make up approximately a third of the semiconductor sector’s sales. But the company is now facing significantly increased competition for its products. Google, Broadcom and AMD among others are taking market share. On top of that, even after last week’s whirlwind visit to China, that market remains largely cut off on the grounds of national security.
US equity markets and soft commodities will be closed for Memorial Day on Monday. As touched on above, be aware of the potential for exaggerated moves through thinner liquidity in the markets that are open. Hong Kong also has a break on Monday, for Buddha’s Birthday.
This week the AUD took a hit after the Australian unemployment rate came in above expectations, rising from 4.3% to 4.5%. This confirmation of a softer jobs market means the RBA will be less likely to continue with their aggressive rate hiking, having now lifted it by 25bp three months in a row. Next week’s CPI number will be closely watched nonetheless, with headline inflation forecast to rise further towards 5%, from 4.6% y/y last month. While another hike in June is very unlikely as it stands, an upside surprise will no doubt encourage a more hawkish sway. The RBNZ is also expected to hold steady, as they did in April.
Similarly in the US, core PCE on Thursday will be a key indicator to the likelihood of a rate hike from the Fed. The votes were split at the April meeting. Will another hot number see more members of the committee pivot? Japan and a number of European countries will also release their monthly CPI readings throughout the week.
