Making sense of the forces driving global markets |
By Jamie McGeever, Markets Columnist |
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- Oil slides as much as 4% at one stage on Monday but Brent futures settle only 1.35% lower at $73.23/bbl, suggesting a chunky risk premium remains in the price. Oil spiked 7% on Friday.
- Wall Street rebounds strongly, with the S&P 500 back above 6000 points and the Nasdaq gaining 1.4%.
- Nvidia shares rise 2% to the highest since Jan 24, within sight of the record peak of $153.13 from earlier that month. Shares are up almost 70% from the post-'Liberation Day' low.
- U.S. Treasury yields rise and the curve bear steepens despite a pretty solid 20-year bond auction. Longer-dated yields up 5 bps.
- Gold gives back Friday's gains, sliding more than 1% to $3,386/oz. The dollar rises 0.5% against the yen ahead of the Bank of Japan's rate decision on Tuesday.
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Truce hopes spark rebound |
Signs of de-escalation between Israel and Iran - or at least hopes of de-escalation - ensured markets started this week much more positively than they finished last week. Whether that optimism is justified remains to be seen but the rebound was pretty strong, taking Wall Street and world stocks back to with sight of their recent highs. It's a very fluid situation, so investors' relief may be short-lived. Iran has called for U.S. President Donald Trump to get Israel to halt its attacks, but both countries continue to fire missiles at each other. Meanwhile, a U.S. official said Trump will not sign a draft G7 leaders' statement calling for de-escalation of the conflict. Optimism that a truce will be reached appears to be stronger in equity markets than elsewhere. Gold gave back Friday's gains but not before hitting $3,451 an ounce, a level last reached when it clocked a record high on April 17; and in volatile trade oil settled 1.7% lower, having surged more than 7% on Friday. Perhaps equity investors have it right. The oil price has less of a bearing on the global growth or asset prices than it used to, and markets have been pretty resilient to Middle East conflicts in recent years, with selloffs proving to be shallow and short-lived. |
Unless there is a real adverse oil price shock it will probably be a similar story this time around, although spiking inflation would be problematic for central banks. Economists at Oxford Economics sketch out an extreme scenario where the closure of the Strait of Hormuz pushes oil up to $130 a barrel, which could lift U.S. CPI inflation to almost 6%. Oil is nowhere near that yet though. As Deutsche Bank's Henry Allen notes, perhaps the story of the year is how resilient stock markets have been in the face of myriad large shocks - DeepSeek's emergence casting doubt over U.S. tech valuations; Europe's fiscal regime shift triggering the biggest daily jump in German yields since 1990; the U.S. losing its triple-A credit rating; Trump's tariffs and the S&P 500's fifth biggest two-day fall since World War Two. And yet here we are, with world stocks at all-time highs. Aside from geopolitics, the focus for investors this week will mostly revolve around central banks. The Bank of Japan will deliver its policy decision on Tuesday, and economists expect it to hold off from raising rates again due to the uncertainty around U.S. tariffs. Later this week we have decisions from Indonesia, Brazil, Switzerland, Sweden, Norway, Britain and the U.S. Federal Reserve. |
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Israel-Iran conflict highlights dollar's tarnished safe-haven appeal |
A dramatic spike in the potential for all-out war between Israel and Iran would typically be expected to spark an immediate and strong rally in the U.S. dollar, with investors seeking the safety and liquidity of the world's reserve currency. That didn't happen on Friday. The dollar's response to Israel's strikes on Iranian nuclear facilities and military commanders, followed by Tehran's initial threats and retaliation, was pretty feeble. The dollar index, a measure of the currency's value against a basket of major peers, ended the day up only around 0.25%. To be sure, the dollar fared better than U.S. stocks or Treasuries, which both fell sharply on Friday. But with oil surging over 7% and gold up a solid 1.5%, a strong 'flight to quality' flow would have lifted the dollar more than a quarter of one percent. The U.S. currency's move was particularly weak given the dollar's starting point on Friday. It was at a three-and-a-half year low, having depreciated 10% year to date, with sentiment and positioning heavily bearish. Yet a significant geopolitical shock generated barely a knee-jerk bounce. For comparison, the dollar rose more than 2% in both the first week of the 2006 Israel-Lebanon War and in the week following Israel's invasion of Southern Lebanon last year. The dollar's weak response to this latest Middle East conflict supports the narrative that investors are now reassessing their high exposure to dollars, in light of some of the unorthodox policies put forward by U.S. President Donald Trump in recent months. |
The dollar was down slightly early on Monday, and gold and oil were giving back some of Friday's gains too, as markets regained a foothold at the start of a busy week packed with key central bank meetings. |
What could move markets tomorrow? |
- Israel-Iran conflict
- Bank of Japan decision and guidance
- South Korea trade (May)
- Germany ZEW investor sentiment survey (June)
- U.S. retail sales (May)
- U.S. import prices (May)
- U.S. industrial production (May)
- U.S. 5-year TIPS note auction
- Bank of Canada minutes
- Headlines from G7 summit in Canada
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. |
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