Written by Talks momentum raises Mideast peace hopes
The ongoing negotiations between the United States and Iran have been the main focal point this week and are likely to remain so heading into the weekend. The talks, which are stuck in the mediation phase, appear to have made some progress thanks to a fresh push by Pakistan.
But the details of the talks continue to be surrounded by mystery, while gauging Iran’s stance amid unreliable sources has also made it difficult for investors to accurately read the room.
Nevertheless, both sides, whether confirmed or not, are signalling that the latest US proposal for a deal has reduced the gaps. US Secretary of State Marco Rubio sounded upbeat when talking to reporters on Thursday but cautioned that he didn’t want to be overly optimistic.
Both President Trump and Rubio have hinted that the next few days will be crucial. Indeed, it is hard to see how Washington and Tehran will be able to overcome the biggest sticking points such as Iran handing over its stockpile of enriched uranium, the lifting of sanctions and who gets to control the Strait of Hormuz.
On the latter, Iran is risking the ire of the United States by discussing with Oman about setting up a toll system for the vital shipping lane of Hormuz, something that Trump has made clear he is against.
Improving Iran mood music pressures oil
The flurry of conflicting headlines about the negotiations has made for very choppy trading in oil futures this week. Despite the bullish start to the week, oil prices have trended lower and are set to end with significant losses. WTI futures are currently down more than 6.5% for the week, even as they rebound 2% today.
However, a sustained drop below $100 a barrel isn’t on the cards unless the Strait of Hormuz reopens and the prolonged disruption to oil and gas flows has already caused a massive energy price shock on a global scale.
Mixed week for euro and pound after dismal PMIs
The flash PMI surveys released yesterday pointed to a further jump in input and output prices in May across the major economies, pressuring businesses. Notably, the Eurozone and UK composite PMIs are now in contraction territory, while UK retail sales figures out today revealed a bigger-than-expected decline in April.
With the ECB almost certain to hike rates next month and the Bank of England probably in July, investors are downbeat about the European economic outlook. The euro has been on the backfoot against the US dollar for the past two weeks, though the pound is headed for modest gains amid some relief about the policies of the Labour hopefuls likely to replace Prime Minister Keir Starmer if there is a leadership contest.
No relief for the yen as dollar awaits Warsh
The yen, meanwhile, remains pinned around 159 per dollar, with the latest Japanese CPI data doing it no favours. Japan’s core CPI rate eased more than expected in April, falling from 1.8% to 1.4% y/y. However, the reduction was mainly on the back of government subsidies to support households with the cost of living, and the Bank of Japan is still expected to raise interest rates in June.
Rate hike bets for the Fed have been rising too, as inflationary pressures accumulate while the Middle East conflict drags on. But with yesterday’s PMIs showing the US economy has yet to take a major hit from the energy crisis, the geopolitical and global stagflation risks have reinforced the greenback’s safe-haven status, and the dollar index has been hovering around 99.30 near its highs for the past six weeks.
As the dollar holds firm, gold has been struggling to rebound from near two-month lows and has been repeatedly testing the $4,500 level during the past five weeks.
Later today, investors will be watching for any remarks by the new Fed chair, Kevin Warsh, on what direction he intends to take monetary policy when he is sworn in at the White House, scheduled for 15:00 GMT.
Stocks buoyant as earnings season wraps up
In equity markets, the unwavering optimism about AI demand continues to fuel gains, with Wall Street closing higher yesterday even as Nvidia finished in the red after a muted response to its earnings on Wednesday. With the exception of China, shares globally have had a good week too, as the AI euphoria has started to spread not only to different markets, but also across sectors.
Add to that the very strong earnings season, geopolitics isn’t at the top of equity traders’ minds at the moment. Yet, it remains to be seen if the current rally can withstand any fresh escalation in the Middle East.
By XM.com
