David Morrison, Senior Market Analyst at FCA regulated fintech and financial services provider Trade Nation.
Asian, European and FX Markets
Asian Pacific stock indices had a mixed start to the week as investors digested the dramatic events which unrolled across the Middle East over the weekend. Hong Kong’s Hang Seng and the Shanghai Composite both ended the session up 0.7%. But Australia’s ASX 200 and the Japanese Nikkei closed down 0.4% and 0.1% respectively. The divergent performance suggests that investors are responding cautiously but not uniformly, with some viewing the US strikes as a contained event rather than the start of a larger regional conflict. It was noticeable that there was no wholesale flight from risk assets during Monday’s session.
European stock indices were modestly firmer soon after the open, shrugging off earlier weakness as the futures markets opened in the early hours of Sunday. The moves suggest that, as across Asian Pacific markets, investors are cautiously optimistic about events over the weekend. The prevailing view appears to be that the US involvement will prove limited militarily, yet effective, by seriously undermining Iran’s nuclear ambitions. Investors are also speculating that Iran’s ability to retaliate has been severely restricted. European equities also got a lift following some relatively benign Manufacturing and Services PMIs from across the region. Notably, the German data came in above expectations, although France disappointed. The UK’s numbers were also encouraging, particularly the pick-up in Services which pushed further into expansionary territory.
Across FX, the US dollar continued to recover its mojo following a particularly bad run of late. Less than a fortnight ago, the Dollar Index hit its lowest level since February 2022 as it pulled back towards 97.00. This morning it was closing in on 99.00, trading at its best level since the beginning of this month. Finally, the dollar is back in demand as a safe-haven amid geopolitical concerns. Not so the Japanese yen, which was lower across the board. The move out of the yen saw the USDJPY close in on 148.00, to trade at its highest level since mid-May.
Cryptocurrencies began the session under pressure following weekend headlines but have since mounted a decent recovery. Nevertheless, the initial reaction to the Middle East escalation saw Bitcoin crash below $100,000 yesterday before rebounding. Ether broke below significant support around $2,400 over the weekend. This followed six weeks of consolidation above here, and while Ether has since rebounded, it looks as if the sell-off may have done some technical damage chart wise.
US Markets
US stock index futures gapped lower overnight as traders responded to the weekend news. President Trump wrongfooted everyone by authorising US involvement in Israeli-Iranian hostilities. US action has been limited so far to bombing sorties aimed at destroying Iran’s nuclear infrastructure. The strikes targeted key facilities in Fordo, Isfahan, and Natanz surprising many investors who had expected diplomatic talks to reconvene after President Trump indicated on Friday that he would make a decision within two weeks.
The situation remains fluid. It’s currently unclear how successful the US mission has been, and it’s uncertain if the US action is set to continue. At the same time, there’s plenty of wild speculation over how Iran is likely to respond, assuming they are in a position to do so. Investors are taking an optimistic view. The overnight gap lower saw the S&P 500 drop towards 5,900 to hit its lowest level since the beginning of this month. But it didn’t take long for dip buyers to emerge, sending all the US majors into positive territory early in the European trading session. Last week’s price action was muted, with the Dow unchanged, the S&P down 0.2%, the NASDAQ up 0.2% and the Russell 2000 0.4% higher for the week.
The Federal Reserve meeting was generally viewed as being more hawkish than anticipated, while the FOMC’s quarterly Summary of Economic Projections suggested a stagflationary environment, with economic growth expectations lowered, and inflation forecasts raised. Once again, the Fed kept rates unchanged in the 4.25-4.50% range, where they’ve been since December. This is winding up President Trump no end, leading him to state that interest rates should be 250 basis points lower, in line with the Eurozone. Mr Trump’s growing frustration with Mr Powell is leading to early speculation as to the latter’s likely successor. The odds are moving in favour of Kevin Hassett, a Trump fan, who, should he be the successful candidate, seems likely to slash the Fed Funds rate as soon as his posterior makes contact with the Chair’s chair.
In the meantime, there’s a stack of Fed members due to speak today, with Mr Powell set for two day’s of testimony in Washington, starting tomorrow. Trade and tariffs have disappeared off the front pages for now, but should soon make a comeback as the 9th July postponed deadline approaches.
Commodities and Metals
Crude oil – Oil prices jumped as much as 4% in early trading on concerns that the US strikes on Iran could lead to supply disruptions, particularly if Iran follows through on threats to block the Strait of Hormuz. Front-month WTI traded up to $77.70, hitting highs last seen in mid-January. However, much of that spike has since faded, with crude now little-changed from Friday’s close. Markets appear to be cautiously optimistic that diplomatic efforts, including calls from the US asking China to persuade Iran to refrain from retaliating significantly, may help avoid a full-blown energy crisis. Still, the risk premium is clearly back in the oil price. But the energy market has changed dramatically since the beginning of this century. The world is far less reliant on the Middle East for energy than it used to be, with the US taking over as the world’s biggest oil producer, thanks to the developments in shale. It’s also the case that OPEC+ has plenty of spare capacity, should it choose to use it. But for now they are likely to hold off from raising output, preferring to profit by as much as possible from the elevated oil price, given recent weakness.
Gold – Gold initially jumped higher following news of the US airstrikes. It gapped up $12 from Friday’s close to trade near $3,390 overnight. But those gains have since evaporated. Gold dropped back sharply soon after the European open, before buyers crept back in to offer some support. Gold’s inability to hold early gains could suggest that traders don’t expect hostilities to escalate further. Alternatively, it could simply be profit-taking in an otherwise well-supported market. More broadly, prices continue to consolidate, and are currently little more than 4% below April’s record high of $3,500. The daily MACD has flattened out just above the neutral area, offering little in the way of guidance over the short-term.
