By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Markets started the week on a surer footing yesterday, with stocks gaining ground, and crude rolling over, as participants continue to closely monitor geopolitical risk, and developments in the Middle East.
WHERE WE STAND – At this point, I’m tempted to record myself saying ‘everything in markets depends on crude’ and ‘crude all depends on how long this lasts’, then just replay it whenever I’m asked a question on the near-term outlook.
I seek not to make light of what remains a grave geopolitical situation, though three weeks into conflict in the Middle East, it is still the case that markets at large are taking their lead from developments in the energy space, and that that distribution of potential outcomes is so wide that pinning a defined timescale on potential de-escalation, or normalisation of flows through Hormuz, remains near-impossible.
That said, while uncertainties persist, and Hormuz is still essentially impassable, crude benchmarks did ease yesterday, with a gap higher at Sunday’s open fading in relatively short order, very much in line with the dynamic that we saw this time last week, incidentally. Whether what follows is the same – namely, a slow but steady grind higher – remains to be seen, though that seems a plausible base case, unless physical constraints do ease materially in the interim.
Regardless, as crude pulled back, this gave markets more broadly a little room to breathe, in turn allowing stocks to gain ground on both sides of the pond, and Govvies to rally too, as participants’ near-term inflation expectations pared somewhat. In turn, gold gained some ground after a modest wobble early doors, as bullion continues to trade more akin to a risk asset than anything else, while the buck retreated, as the dollar lost ground for the first day in four, taking the DXY back under the 100 mark.
Zooming out a bit, those moves do mean that we remain inside the ‘nothing ever happens’ trading ranges that some readers may recall I noted a while back – namely, 6,600 to 7,000 in spoos; 96 to 100 in the DXY; and, 4.00% to 4.30% in the benchmark 10-year Treasury yield. Clearly, quite a lot has happened, and again I’m not diminishing the significance of recent developments, but it is remarkable that markets have proved so resilient, in the face of such a large geopolitical, and commodity, shock.
I suppose, if one were so inclined, the word ‘resilient’ could be swapped out for the word ‘complacent’ in the above sentence, though I’d argue that would be wide of the mark, not least considering how participants remain wary not to get ‘caught short’, having had their fingers burned by the numerous Trump U-turns (or TACOs) that have taken place over the last year or so.
Regardless, for now at least, with little sign of an off-ramp being taken just yet, and amid scant progress in restoring a more normal level of transit through Hormuz, I retain the biases outlined yesterday. Namely, a cautious view of equities in the short-term, though the longer-run bull case remains intact; a working assumption that crude benchmarks will continue to grind slowly but steadily higher; and, a view that the greenback is really the only haven that works in the current environment, and should hence continue to perform well.
LOOK AHEAD – A few bits and bobs on the data docket today, though participants’ focus remains almost entirely on geopolitical events.
Still, this morning’s German ZEW sentiment surveys will be one of the first datapoints that we’ve had collected since conflict began, and will help to give us some steer as to the initial impact that geopolitical uncertainty, and surging energy prices, are having on the economy.
Besides that, this afternoon’s US pending home sales report is likely to be ignored, while the 20-year Treasury bond auction shan’t provide much by way of signal, with this being by far the most unloved segment of the curve in normal times, let alone an environment where the risk of an inflation spike is at the forefront of traders’ minds.
|
|||
