By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Trade on Tuesday was cagey and contained, with geopolitical developments still being monitored closely, ahead of Friday’s deadline. Today, the Middle East will remain in focus, while UK CPI highlights the data docket.
WHERE WE STAND – From a market’s perspective, yesterday was a bit of a snooze. I must say, what a welcome snooze that was after such a hectic three weeks or so!
To be clear, conflict in the Middle East has not yet ended, while the Strait of Hormuz remains essentially impassable. There also seems to have been relatively little by way of concrete steps towards de-escalation, at least those which are in the public domain.
Can we say ‘no news is good news’?
No, not really, especially as we saw relatively cagey trading conditions across the board, not least as crude benchmarks resumed their grind to the upside. In turn, this caused Govvies to sell-off once more (not helped by an ugly 2-year Treasury auction), while also causing some degree of shakiness in the equity complex too, where a small chunk of Monday’s gains were unwound, though downside was relatively contained on the whole, and we’ve pared much of the downside overnight in any case.
That caginess can, of course, be explained by the looming Friday deadline that President Trump set at the start of the week, having postponed possible attacks on Iranian energy infrastructure for a five day period. Understandably, with that uncertainty hanging like the ‘Sword of Damocles’ over financial markets, few participants are prepared to materially up their exposures to risk assets at the current juncture. Barring concrete signs of de-escalation, you’d expect those cautious tones to continue as the week wears on, and the aforementioned deadline looms increasingly large on the horizon.
As for the news flow, I guess it all nets off to nothing really. On the one hand, media reports flagged that Iranian sources had noted how Tehran was ‘willing to listen’ to US outreach, and potentially take part in negotiations regarding a concrete agreement to end the conflict, or to enact a one-month ceasefire. On the other, various stories pointed to the deployment of additional US troops to the Middle East, though a decision whether to put ‘boots on the ground’ has not yet been made.
Fundamentally, zooming out, it remains the case that the distribution of potential outcomes here is still incredibly wide, and with every passing headline we swing violently from one end of that distribution, to the other.
That sort of an environment makes accurately pricing risk something of an impossibility for markets, and will likely remain so unless and until concrete indications of de-escalation emerge, which we of course hope comes in short order. In the meantime, participants will probably continue seeking out shelter in the only haven that works right now – which bodes well for the greenback, if nothing else.
LOOK AHEAD – It probably goes without saying at this point, but geopolitical events will again remain in focus today, and be the primary driver of proceedings.
That said, there are a few items of interest on the data docket. This morning brings last month’s CPI figures from here in the UK, with headline CPI set to have remained unchanged at 3.0% YoY, while services inflation is set to slow 0.2pp to 4.2% YoY. Still, with that data referencing a time before the surge in energy prices, it’s likely to have little-to-no impact on the BoE policy outlook. The same can be said of this morning’s IFO sentiment surveys out of Germany which, while likely painting a fairly pessimistic picture, won’t matter much in the grand scheme of things.
Besides that, today marks the annual ‘ECB Watchers Conference’, meaning that a host of policymakers will be popping up on newswires throughout the day, while we also have a 5-year Treasury auction stateside, which will take on extra importance after yesterday’s ugly 2-year sale, that tailed the when-issued yield by the most in three years.