By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Markets were again choppy yesterday amid another barrage of geopolitical headlines, with those headlines set to remain on focus today, overshadowing the February US CPI figures.
WHERE WE STAND – These days, we’re all crude traders.
I jest – slightly – but it remains the case that pretty much every asset you look at continues to display an incredibly tight correlation with ‘black gold’, as participants across the globe remain laser-focused on developments in the Middle East.
In any case, conditions in the crude complex seem becalmed at least for the time being, with participants having found a degree of comfort in Monday’s comments from President Trump that the war will end ‘very soon’ and that things are ‘pretty much complete’.
Despite that, there is still a distinct lack of progress in terms of actual de-escalation, or in terms of transit through the Strait of Hormuz resuming in any meaningful manner. On that latter front, there were some reports of a US Navy tanker escort yesterday, though they were dispelled rather rapidly, while US intelligence has reportedly seen signs that Iran may be deploying mins in the Strait – clearly, an incredibly worrying development if this is the case, given that this would massively complicate the re-opening process. Compounding all that, the G7 and IEA continue to drag their feet when it comes to releasing stocks from strategic petroleum reserves.
All that said, the broader dynamic for financial markets remains largely unchanged. Correlations are still pretty much at 1 across the board, with everything trading tick-for-tick with crude benchmarks, and moves in the energy complex being almost the sole determinant of sentiment more broadly.
Added to which, this is still a market where nobody wants to be ‘caught short’, where participants still have a working assumption that, at some stage, political actors will always pullback from what are deemed irrational actions, ‘every man and his dog’ is desperate to price the right-tail outcome, with participants then jumping over each other to do so, front-running the potentially inevitable policy pivot, with nobody wanting to be the last bear to change their mind!
Still, we do need to be somewhat careful on that front, taking into account not only the energy situation mentioned above, but also the fact that I’m still not entirely sure how you ‘TACO’ your way out of a war when the other side don’t appear overly willing to negotiate at this stage. All that said, while markets continue to trade from headline-to-headline, if there are indeed moves afoot to provide navy escorts to tankers, that is likely to result in a further risk premium being priced out of crude benchmarks, and the market at large, in pretty short order, as it would likely lead to secure Hormuz passage becoming the base case once again.
Anyway, the general vibe of trade yesterday was one of a choppy and messy rollercoaster ride, which saw most assets end the day roughly where they started it, as the risk rally, and dollar selling, both fizzled out into the latter part of the NY session.
It’s pretty tough at this stage, from a short-term perspective at least, to do anything other than assume that the market will remain relatively choppy, with caution prevailing to a degree, and crude remaining in the driving seat in terms of intraday market moves. Zooming out, though, participants will continue to pay close attention to any signs of off-ramps being taken, or de-escalation being on the cards, while I remain of the view that this short-term turbulence is likely to be just that, with current geopolitical events unlikely to mark a longer-run turning point away from what is still a robust underlying bullish risk narrative.
LOOK AHEAD – The monthly US CPI figures are usually a standout event risk for markets to navigate, but participants continue to care little about incoming economic data, given the fluid geopolitical backdrop.
Hence, today’s inflation report is unlikely to move the needle much, either from a market perspective, or in terms of the Fed policy outlook, given that the data was compiled before the recent energy price shock. Regardless, both headline and core CPI are seen unchanged, at 2.4% YoY and 2.5% YoY respectively, with it likely needing a material surprise for anyone to get excited by the data.
Elsewhere, the US sells 10-year notes this evening, while a handful of central bankers from the Fed, ECB, and BoE are due to speak on financial stability – how thrilling!
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