Written by Middle East ceasefire goes up in smoke
The United States and Iran carried out strikes for a second night against each other’s targets, effectively ending the two-month-old shaky ceasefire and dashing hopes of an imminent deal to end the war. The escalation came after Iran reportedly downed an American Apache helicopter on Monday.
However, the flare-up doesn’t come as too much of a surprise, as the two sides have been negotiating for weeks but to no avail. President Trump’s latest posts on Truth Social clearly indicate the US is running out of patience, accusing Tehran of taking too long to reach a deal and that they will have to “pay the price”.
There’s now a danger that the fighting will enter a more dangerous phase after Iran claimed the US struck civilian infrastructure, damaging two water reservoirs. Iran retaliated by attacking US military bases in Kuwait, Bahrain and Jordan.
Unusual calm in oil markets
The escalation has soured the mood in the markets where sentiment was already looking fragile of late amid concerns about an overstretched AI rally and renewed bets of Fed rate hikes this year. And surprisingly, it is oil prices that have seen a more muted reaction this time round, with WTI holding within a $86-$97 range since late May.
Investor fatigue could be partly to blame for the reduced volatility, but it’s also true that peace hopes have not completely dissipated. Trump’s comments suggest that US and Iranian officials are maintaining contact, something denied by Tehran. Moreover, Trump’s boast that the US military has freed up about 100 million barrels of oil along the Strait of Hormuz may be reigning in some of the worst fears about energy shortages, even as crude oil inventories are being drawn down at a rapid pace.
Both WTI and Brent crude futures are off earlier highs to trade about 0.5% lower at the start of the European session.
Gold and cryptos rebound but not out of the woods
Gold prices are on a steadier footing after tumbling to a new seven-month low earlier today, coming uncomfortably close to breaching the crucial $4,000 technical barrier. It’s since rebounded to around $4,100, but with inflation risks accumulating rather than subsiding, further losses are more likely than not.
Cryptocurrencies are also recouping some losses, although unlike gold, Bitcoin seems to have drawn a line over its three-week slide that briefly tested the $60,000 mark last week. Bitcoin is currently making its way towards $63,000.
Will an ECB hike boost the euro?
The initial relief yesterday on the back of the US CPI report for May that produced no upside surprises and there was even a slight miss in month-on-month core CPI didn’t last long. A 25-bps rate hike by the Fed in December remains largely priced in, as the US economy shows little sign of strain from the Middle East conflict and headline inflation has returned above the 4% level for the first time in three years.
Whilst investors will have to wait until next week to learn where the new Fed Chair Kevin Warsh stands on the pickup in US inflation, the European Central Bank doesn’t want to risk being behind the curve and is widely anticipated to hike interest rates today.
Yet, the euro has barely recovered from its post-NFP dip to $1.1499, as the ECB will probably not pre-commit to further hikes, while there’s a good chance the Fed will lean more hawkish at its meeting.
US PPI on the agenda as investors digest BoC and CPI report
The Canadian dollar on the other hand is under pressure today, weakening to a six-month low after the Bank of Canada on Wednesday struck a somewhat more cautious-than-expected tone when it kept rates unchanged.
The Bank of Canada is more concerned about growth than inflation right now and this is hurting the loonie versus the US dollar, which is once again finding itself on the front foot amid Fed tightening bets and geopolitical risk.
The focus later today will be on the producer price index for May, as well as the weekly jobless claims, for more clues on where price pressures and the labour market are headed.
The dollar is trading flat against the yen today, having extended a more than four-week climb above the 160.00 level.
AI rout could be easing
In equity markets, chip stocks remain a drag on broader indices, although there are some signs that the selloff is easing, with ASML rebounding 3.5% in Amsterdam today and US futures turning positive after a bruising week-long decline.
However, a green candle on Thursday is not a certainty as Oracle shares slumped in after-hours trading on Wednesday after investors were disappointed by the company’s cloud revenue when it announced stellar fiscal fourth quarter results.
The upcoming IPO by SpaceX could also hold back any rebound as tomorrow’s $75 billion offering could dry up liquidity for other stocks.
But on the whole, Wall Street is poised for a steadier day as the VIX volatility index retreats from more than two-month highs.
By XM.com
