The ceasefire continued, but so did the attacks. A US official assured us on Thursday via Fox News that there “was not a restarting of the war or end of ceasefire”. These comments came shortly after strikes on Iran’s Qeshm Port, Bandar Abbas and Bandar Kargan naval checkpoint by the US military. Earlier in the day, Iran had accused the US of violating the ceasefire by targeting two ships in the Strait of Hormuz and attacking civilian areas on Qeshm Island. This contradictory course of events and associated announcements revived supply concerns and sparked a reversal in energy markets. Brent finished the session up 1.3%, having been down as much as 5.8% early on. Unsettled sentiment weighed on equity markets too, approaching the release of Nonfarm Payrolls this evening.
All three major US indices had closed at record highs on Wednesday. The Dow was the last of the three to recover from the rout brought on by the start of the Iran excursion. It spent 27 days in technical “correction territory”, before breaking out and through the much vaunted 50k level this week. A wave of optimism following the cluster of big tech earnings reports saw this week start amid a cloud of increasingly positive sentiment. Energies pulled back, a number of tech stocks went parabolic, metals pushed higher and the dollar took a breather. However Thursday’s action saw more cautious trading and indeed pullbacks.
Having threatened earlier in the week to raise tariffs on trucks and cars from the EU to 25%, DJT set a deadline this morning for the implementation of the conditions laid out in the Turnberry agreement. The accord drawn up almost a year ago most notably capped tariffs on EU goods at 15%. Following a transatlantic duel reminiscent of Watson vs Nicklaus at the same site circa 50 years earlier, Trump and Ursula von der Leyen announced a framework “agreement on reciprocal, fair and balanced trade”. But US trade officials have since grown frustrated with their EU counterparts, accusing them of dragging their heels on implementing their side of the deal. Thus now a deadline made public, 4 July, along with renewed threats of much higher tariffs if action by then is not deemed sufficient.
Von der Leyen confirmed in response that both sides remain committed “to delivering meaningful progress toward tariff reductions”. That statement of intent is now set to be tested over the coming weeks. No doubt the surrounding rhetoric will ramp up as the deadline approaches. Will market participants continue to put threats of increased and/or new tariffs in the TACO basket, to be largely ignored? Or will we start to see a resumption of the associated moves seen back in early 2025? Growth expectations in Europe have already been revised lower, largely on the back of the NACHO situation. How will renewed tensions in the tariff arena test an already fragile environment?
Meanwhile the US Trade Court ruled in a split decision that Trump’s 10% temporary global duties are unlawful. However they remain in place for now, ahead of an anticipated appeal.
Echoing questions posed in this publication recently, Morgan Stanley released a note overnight proclaiming that gold is now a rates trade rather than a safe haven. Gold is down 14.5% since the start of the conflict in Iran, underperforming against the assets for which it is theoretically supposed to provide a hedge against, the S&P 500 down 7.8% in the same period. MS did however make a bullish case for the medium term, setting a price target of $5,200 per oz before the year is out. Its target is predicated by four main factors: a resumption of ETF buying; China increasing its reserves; a weaker USD; and most importantly two expected rate cuts in 2027 by the Fed. In essence a return to pre-Hormuz conditions. We still point at their second condition as a primary driver in the current environment: the activity of institutional buyers or lack thereof, in particular central banks, in providing a floor.
Reuters reported today that Japan spent as much as JPY5trillion (approx. $32billion) between 1-6 May, intervening in the FX market. This followed an initial round of yen buying that was carried out on 30 April, after USDJPY had broken through the 160 handle. The cost of this first round is estimated at $35billion. The fact that the following bouts of intervention coincided with a week-long holiday period is of course no accident, thin market liquidity leaned into for greater impact. This apparent confirmation from Japan of an aggressive defence of its currency will naturally come as little surprise to traders who have observed the outsized moves in JPY over the last two weeks. But of interest was Mimura, the nation’s top currency diplomat, stating that there are “no rules restricting the number of interventions”. This appears to contradict the IMF’s free float classification, under which three instances of intervention are permitted within six months, and would seem to indicate that further action is not off the table.
China will release its trade figures over the weekend, followed by CPI on Monday, expected to be up 0.8% y/y. The US likewise releases CPI and PPI, and later in the week retail sales numbers. US CPI will be particularly closely watched as a guide for rate expectations. The UK will put out its GDP move for Q1 on Thursday.
US earnings season is winding down. Nvidia is the last of the mega caps to report, currently scheduled for 20 May. Cisco, Alibaba and JD.com release their Q1 reports next week. Progress of a controversial proposal by the SEC to move from quarterly to half-yearly reporting will be watched with interest by traders.
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