Asian-Pacific indices rally on peace deal

US stock index futures were sharply higher this morning, with tech stocks at the vanguard of the move. There were some hefty gains across the chip sector, particularly in the ‘second division’. This had suffered a flurry of profit-taking recently after a stunning rally between the end of March and the beginning of this month. But buyers rushed back in this morning, giving the sector a boost.

Micron Technology was up 7.7%, while SMC and Marvell Technologies added 5.8% and 5.5%, respectively. AMD tacked on a healthy 4.8% while NVIDIA lagged, only capable of a 2.3% gain.

Monday’s strong start to what will be a holiday-shortened week (the US is closed on Friday for Juneteenth) follows a positive session on Friday. Once again, tech took the lead with the NASDAQ and the S&P 500 adding 2.0% and 1.3% respectively. The Dow gained 1.1% while the small cap Russell 2000 ended 0.8% higher.

Source: TN Trader

The SpaceX IPO went very smoothly. The first trade was agreed at around $150, representing an 11% premium over the issue price of $135. The stock then rallied throughout the session, ending over $160 per share for a gain of 19%.

It looked like a Goldilocks result and a clever bit of pricing. There was a respectable premium on the open, and enough demand to keep the stock buoyant into the close. SpaceX added another 6% in early trade this morning.

US stock indices had a difficult start to last week. This followed a hefty selloff across tech after some disappointing forward guidance from Broadcom and stronger-than-expected payroll numbers. The latter boosted expectations that the Federal Reserve would be forced to raise rates this year, possibly by as much as 50 basis points.

Then there were clashes between the US and Iran, while Israel attacked targets in Lebanon, which made any progress towards a peace deal look unlikely. But sentiment turned more positive on Friday afternoon following comments from Pakistan’s Prime Minister Shehbaz Sharif. He said that the US and Iran had agreed on the text of a deal. This has been confirmed over this weekend, and both sides are expected to sign the agreement this Friday in Switzerland.

Oil slumped, as did the dollar, on the news, while equities caught a bid. There are still some major issues to consider, such as Iran’s enriched uranium, and there’s still a danger that Israel hasn’t finished with Hezbollah in Lebanon. But the overall tone has improved dramatically, and the Strait of Hormuz could soon be reopened.

The Federal Reserve’s FOMC meets this week to discuss monetary policy. There’s no expectation for any change in interest rates. But the FOMC will produce their quarterly Summary of Economic Projections. This is where members lay down their forecasts for interest rates, inflation, unemployment and economic growth for the rest of this year and beyond. This is also Kevin Warsh’s first meeting as Chair of the Fed. So, what he says about interest rates, given that inflation is still twice the Fed’s 2% target, should be interesting. 

European stock indices followed US stock index futures higher this morning. Equities found a bid on the success of Friday’s SpaceX IPO, and on positive moves to end the war between the US and Iran. All the European majors were up over 1% mid-morning.

Source: TN Trader

But the UK’s FTSE 100 could only manage a modest advance. The hefty drop in the oil price since Thursday has put considerable downside pressure on the oil majors, which are significant FTSE 100 constituents. BP and Shell were down 3.3% and 4.4% in early trade this morning. But otherwise, the UK and Europe should be major beneficiaries of the peace agreement between the US and Iran.

Once the agreement is signed on Friday, it shouldn’t take long for a toll-free reopening of the Strait of Hormuz. This should reduce concerns over the energy supply disruptions, which have been such a major issue since war broke out at the end of February.

The US dollar came under heavy selling pressure in the latter part of last week after initial strength. On Thursday, the cash Dollar Index broke above significant resistance at 100.00. Buyers came in following the release of some mixed wholesale inflation data, and after President Trump took to social media, threatening US military attacks on Iranian infrastructure, including the vital Kharg Island oil terminal.

But then Mr Trump dialled down the rhetoric, saying progress had been made with Iran over a peace deal. This was confirmed by Iranian state media, and oil prices fell sharply, as did the US dollar. The greenback has been the ‘go-to’ haven every time there has been an escalation in US/Iranian hostilities. So, it’s only to be expected that it would drop on any indication that peace may be about to break out.

The pullback was quite severe and extended overnight as it became apparent that significant progress had been made in peace negotiations. But the cash Dollar Index keeps finding support at the upper end of a support box with a top at 99.10, which stretches down to 98.70. So, despite this recent weakness, the dollar rally still could have legs.

The Bank of Japan holds its latest monetary policy meeting overnight. The consensus view is that the Bank will raise rates for the first time since October last year. The expectation is that the BOJ will raise its key Policy Rate by 25 basis points to 1.00% from 0.75%. If so, this would take it to levels last seen in 1995. The USD/JPY remains over 160.00, not far below 160.73, which is where the Ministry of Finance intervened at the end of April.

Source: TN Trader

Gold gapped higher overnight, boosted by a sharp pullback in the US dollar. The recovery began last week following a torrid period for gold, which saw it drop back to levels last seen in November, just north of major support at $4,000. Gold came under pressure as investors sought out safety in the US dollar. They did this as the US and Iran traded insults and missiles, suggesting that peace negotiations were proving useless. But as last week progressed, the tone shifted markedly.

On Thursday, US President Trump said that both sides were close to agreeing on terms. There was little reaction to the news, as traders have heard this all before. But then sentiment turned positive when Tehran confirmed the reports.

So, the precious metal has passed the first test of significant support around $4,000. But the danger this week is that something happens to delay the signing of the treaty on Friday. If that were to happen, then $4,000 could get tested once again.

Source: TN Trader

It’s a similar story for silver, which fell to its lowest level since March early on Thursday morning. But it also managed a sharp turnaround as news of progress in US/Iranian peace negotiations was confirmed. Silver traders will keep a close eye on headlines and the US dollar, hoping that a lasting deal can be struck and that the Strait of Hormuz will soon be reopened.

Source: TN Trader

Front-month (August) Brent crude fell to a two-month low this morning, having gapped down sharply from Friday’s close. Oil prices had already started to pull back on Thursday last week as bad news morphed into good over US/Iranian peace negotiations.

Source: TN Trader

Then, over the weekend, President Trump announced that the naval blockade on Iran would end and that shipping through the Strait of Hormuz would resume once the agreement is formally signed on Friday.

Confirmation came from Pakistan’s Prime Minister Shehbaz Sharif, who said that the US and Iran had declared an immediate and permanent termination of military operations. That meant the US ending its blockade of Iranian ports in the region, and that Tehran would ensure toll-free passage for shipping through the Strait of Hormuz. That certainly takes some pressure off Asian Pacific countries as well as Europe and the UK.

These are the main customers for energy and other chemicals, which are transported through the Strait. The pullback in oil prices should also please central bankers who have had to consider the effects of elevated energy costs as they play into stubbornly high inflation. But market participants remain alert to the risk that any deal to bring about a permanent end to hostilities could be put into jeopardy by missteps over the coming week.

Markets begin the week with a much stronger tone following the announcement of a peace agreement between the US and Iran.

The prospect of the imminent reopening of the Strait of Hormuz has significantly improved investor sentiment, reducing concerns over energy supply disruptions and supporting equities across Asia, Europe, and the United States.

Attention now turns to several major events this week, including Federal Reserve policy decisions, the Bank of Japan meeting, UK inflation data and housing and retail sales figures from the United States.

Investors will also continue assessing the implications of SpaceX’s blockbuster IPO, which has reinforced enthusiasm for technology and growth sectors. However, questions remain about valuation levels and whether recent gains can be sustained.

While the market is currently embracing the prospect of peace, traders are likely to remain cautious until the agreement is formally signed on Friday. Any delays or unexpected developments could quickly bring volatility back into focus.

* The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance.