Asia Pacific markets see rebound

US stock index futures were little changed in early trade this morning. The S&P 500 futures traded down to 6,530 overnight before rebounding to 6,600 as Europe opened for business. Since then, they have drifted lower in a fairly aimless manner. Yesterday saw some wild out-of-hours price action.

Global stock indices began the week on the backfoot following a stream of threats and counter-threats between the Trump administration and Tehran over the weekend. This saw the S&P slide towards 6,430 to hit its lowest level in close to seven months.

Source: TN Trader

Both Brent and WTI were trading back above $100 per barrel. Precious metals continued their dramatic slide from Friday, and the US dollar was rallying. Suddenly, the dollar and oil collapsed, while equities, gold and silver surged higher. The reversal came out of nowhere, and it took several minutes to find the cause.

By now, it’s well-known, if somewhat controversial, that a social media post from President Trump was the catalyst. In it, he announced that he was pausing US attacks on Iran’s energy infrastructure for five days, citing good, productive conversations over the weekend between the US and Iran regarding the resolution of hostilities. This claim was quickly rebutted by Tehran, and some of the heat came out of the reversal.

So, investors are still unclear about what happens next. The fog of war is thick. The Strait of Hormuz remains closed to just about everything, and that should continue to support energy prices. This, in turn, plays into fears of higher inflation, adding to concerns that were building even before hostilities began. The tailwinds from rate cut expectations have turned into a headwind as the probability of future rate hikes gets baked into risk assets.

Meanwhile, worries over the return on investment linked to AI, along with fears that private equity may be blocking some pipework in the financial system, still lurk out there. Yet investors know that buying the dip has worked out well since the lows hit in October 2022. Will it work again? Maybe.

But investor risk appetite may not be quite as healthy nowadays compared to previous years, particularly as borrowing costs look likely to rise rather than fall. And stock market volatility has risen sharply, suggesting that the risk environment is not as benign as it was, even a few months ago. Time for some caution.

European stock indices were mixed in early trade on Tuesday as investors continued to monitor developments across the Middle East. All the majors showed signs of consolidation following yesterday’s sharp bounce after trading at multi-month lows earlier in the session.

Source: TN Trader

In fact, the German DAX hit its lowest level since last April. President Trump’s comments on social media triggered a sharp rally across European and UK equities yesterday morning.

He claimed that weekend talks between the US and Tehran had been productive, and so he was delaying further US attacks on Iran’s energy infrastructure for five days. But Iran countered Mr Trump’s claims, and as things stand, the Strait of Hormuz remains blocked to most shipping.

European equities had outperformed the US for the first two months of this year as they were seen as more attractive from a valuation perspective. But elevated oil prices have damaged that thesis as Europe is badly exposed to higher energy costs, relying as it does on imported oil and gas, unlike the US.

This morning’s release of Flash Manufacturing and Services PMIs showed a general improvement in the manufacturing sector, while services disappointed. This should weigh on sentiment, given the importance of the service sector to the economies across Europe and the UK.

There was a semblance of calm across FX this morning following yesterday’s volatile trading session. The US dollar was a tad firmer across the board today, with the cash Dollar Index trading just north of 99.00.

It was sharply higher in early trade yesterday as it once again behaved as a haven for investors following US and Iranian verbal belligerence over the weekend. This saw the cash Dollar Index retest resistance around 100.00 early on, before it reversed sharply following comments from President Trump on social media.

Source: TN Trader

These suggested that the US was in dialogue with Tehran, and this boosted hopes that both sides may at least start to come to a deal on ending hostilities. But Iran disputed that talks had taken place, and the dollar bounced, making back a significant proportion of its earlier losses.

Traders are now in limbo, awaiting further concrete news. On the monetary policy side, yesterday, San Francisco Fed President Mary Daly warned that sustained increases in oil prices linked to the conflict could complicate the Federal Reserve’s policy outlook, leaving markets sensitive to further developments.

As things stand, investors have already priced out the likelihood of further rate cuts this year, with some even forecasting that the Fed’s next move could be a hike. Much will depend on what happens to energy prices, which in turn will focus on how long hostilities last and when shipping can pass safely through the Strait of Hormuz.

Gold continues to display some extreme volatility as prices fell further, adding to the sharp decline which began last week. Gold slumped on Wednesday and briefly dipped below $4,100 yesterday morning for an overall loss from last week’s support of 18%. Selling accelerated after support around $5,000 per ounce finally gave way.

Source: TN Trader

The move was exacerbated as investors rushed to unwind positions, spurred on by the stronger US dollar and a jump in Treasury yields. Both moves reduced the appeal of non-interest-bearing bullion. The downside move has been dramatic, and some may say that it is overdone. But the speed of the move will have led to some panic as recent buyers rushed to cover their positions.

Many players will have been badly bruised by the gold market over the last two months, especially as the calls for it to continue to rise to $10,000 or beyond intensified throughout its parabolic rise at the beginning of this year.

Front-month WTI began the week trading north of $100 per barrel. This followed the tense exchanges over the weekend as the US and Iran upped the threat levels. President Trump gave Tehran a 24-hour window to reopen the Strait of Hormuz or risk a devastating attack on its energy infrastructure – something which would not just destroy its economy but make life intolerable for its citizens.

Iran responded by saying it would target the oil, gas and desalination facilities of its neighbours around the Persian Gulf. Crude then plunged after President Trump said that constructive talks had taken place with Tehran over the weekend.

WTI dropped to within a few cents of $84 for an overall drop of 16% in a few hours. Prices rebounded after Iran strenuously denied that such talks had taken place. Front-month WTI is trading back within its recent trading range of $100-$90, albeit at the lower end.

Source: TN Trader

The market remains subject to any news out of the Middle East and, as we’ve seen, oil prices could drop sharply on any indication that hostilities were coming to an end.

Likewise, higher prices are just as likely should this war drag on much longer. After all, the Strait of Hormuz remains effectively closed despite limited vessel transit under Iranian control. Some LPG shipments reportedly passed through toward India under strict permission requirements.

Crypto markets rebounded after President Trump signalled a pause in strikes on Iranian power plants and energy infrastructure, triggering a relief rally across digital assets. Yesterday, Bitcoin rallied from a morning low under $68,000 to $71,800, its best level since last Wednesday, in a matter of hours. The move was like that across US stock indices, although Bitcoin registered a 6% low-to-high rally, compared to 4% for the S&P.

The earlier sell-off followed warnings that Iranian power plants could be targeted if the Strait of Hormuz was not reopened. In response, Iran threatened retaliatory action against US and Israeli positions, adding that it could also target desalination facilities of its neighbours around the Persian Gulf.

The rebound in Bitcoin came after President Trump announced a five-day pause in strikes on Iran’s energy infrastructure, saying this was a result of constructive talks between the US and Tehran over the weekend. Iran has disputed this claim.

Market volatility remained elevated even after the VIX dropped back from the highs seen yesterday morning. It continues to trade around levels last seen in the aftermath of last April’s Trump Tariff Temper Tantrum, although it is below its recent peak, which was hit just over a fortnight ago. This reflects continued uncertainty around the evolving geopolitical situation and energy market risks.

Risk assets have stabilised this morning after President Trump stepped back from immediate strikes on Iranian infrastructure. This followed yesterday’s morning session in which bearish momentum had previously dominated trading.

Despite the rebound, Iran continues to dismiss US claims regarding talks and possible resolutions, leaving uncertainty elevated. The situation remains fast moving, and markets are likely to stay sensitive to headlines, reinforcing the need for investors to remain on their guard.