Written by Middle East ceasefire holds for now
President Trump has extended the ceasefire with Iran that was due to expire today even though there have been no new talks aimed at ending the more than month-long conflict. Citing the “seriously fractured” government of Iran, Trump appears to have heeded the advice of Pakistan to give officials in Tehran more time come up with a “unified proposal”.
However, whilst this is good news in terms of preventing an escalation after Trump again threatened to bomb Iran’s energy infrastructure, particularly as it’s an indefinite extension, it’s not exactly progress either, as the Strait of Hormuz remains effectively shut. The vital oil passageway continues to be blockaded by both sides, with the US not letting through any ships headed to and from Iranian ports and Iran threatening to fire on all other vessels.
Thus, there’s no relief for oil flows from the region and so the risk of severe energy shortages hasn't subsided. WTI futures are trading at around $89.30 a barrel, easing from an intra-session high of $90.44, while Brent futures have slipped back below $99.00 a barrel.
Softer dollar lifts gold amid some peace hopes
The US dollar mirrored oil’s moves, coming off earlier highs against a basket of currencies as European trading got underway. Although tensions remain high, it’s encouraging that the US and Iran seem to want to give diplomacy another chance. Nevertheless, there are plenty of investors that think their differences are too wide to bridge, hence the caution and why the dollar’s pullback is on pause until there’s a more decisive outcome in the bid for a peace deal.
The greenback’s resilience is a setback for gold bulls, as the precious metal’s rebound has stalled while ceasefire talks are put on hold. Still, following yesterday’s dip to a more than one-week low of $4,667, gold is paring its losses today, making its way up to the $4.750 region.
Warsh makes case for smaller balance sheet
Developments in the Middle East weren’t the only thing on the dollar’s mind yesterday as investors got a chance to hear from the new Fed chair nominee, Kevin Warsh, for the first time. In his much-awaited confirmation hearing before the Senate banking committee, Warsh attempted to defuse the controversy around his nomination and Trump’s constant attacks on the Fed’s independence.
Warsh sought to quell those concerns by insisting that “Monetary policy independence is essential” and denying claims that the President asked him to cut interest rates. Although it’s doubtful whether Warsh managed to completely convince all Senators, let alone investors, his confirmation hangs in the balance, as Republican Senator Thom Tillis continues to threaten to block his nomination unless the Trump administration drops all its investigations into outgoing Chair Powell. A vote is not expected until May 11 at the earliest.
The main takeaway for the markets, though, is that Warsh believes that productivity gains from AI will enable the Fed to lower interest rates even as the energy crisis unfolds, as he pushed for a new inflation framework. But perhaps, more importantly, Warsh doesn’t seem to have changed his old view on the need for the Fed to have a smaller balance sheet, telling Senators that he will work with the Treasury Secretary “to find a way” of achieving this.
March data takes centre stage
His comments didn’t have much impact on Fed rate-cut expectations, but along with surprisingly upbeat retail sales figures for March out of the US, they did boost the dollar slightly.
Elsewhere in the FX sphere, the pound edged marginally higher, climbing to $1.3530 after the release of UK CPI data. Headline inflation in the UK jumped from 3.0% to 3.3% y/y in March as expected, but the month-on-month rate rose slightly more than forecast and producer prices shot well above the top estimates. So despite core CPI coming in a little on the soft side, UK inflationary pressures appear to be heating up again.
The kiwi was the second best performer for a second day, advancing to $0.5917 following yesterday’s stronger-than-expected quarterly CPI prints.
Wall Street pauses for breath ahead of Tesla earnings
Equity markets struggled under the weight of all the uncertainty, whether Fed or geopolitically related. The S&P 500 and Nasdaq 100 declined for a second day on Tuesday, paring a fraction of the past three weeks’ incredible gains. Despite all the turmoil in the Middle East, renewed optimism about AI fuelled Wall Street to new all-time highs last week.
But amid the complacency about the potential severity of the energy crisis, the Q1 earnings season might be a bigger test for tech stocks. Tesla will be the first of the Magnificent Seven stocks to announce its latest results after the market close today. Earnings by IBM and Texas Instruments will also be under spotlight as the AI trade makes a comeback.
By XM.com
