Asian-Pacific stock indices on the back foot

US stock index futures were sharply lower in early trade on Monday, but trimmed some of these losses as the European session progressed. Nevertheless, traders began the week in ‘risk-off’ mode following the lack of progress between the US and Iran during protracted peace talks in Pakistan over the weekend.

The fragile ceasefire, which was announced late last Tuesday, appears to be holding despite accusations of abuses by both sides. President Trump has made clear his frustration that Iran continues to block most of the shipping attempting to transit the Strait of Hormuz.

He announced that the US Navy would begin blockading ships entering or leaving Iranian ports following the failure of peace talks over the weekend. This would suggest that even less traffic will be able to pass through the Strait, with Iranian-produced crude unable to reach its main buyer, China.

The US Central Command confirmed it would begin blocking maritime traffic to and from Iranian ports at 10 am ET today, adding that vessels travelling to non-Iranian ports would not be impeded.

As far as financial markets are concerned, reopening the Strait of Hormuz remains the key requirement for reigniting a sustainable rally across risk assets. The fact that it remains closed with transit controlled by Tehran is completely unacceptable. Yet there’s also a conviction, rightly or wrongly, that the war will end relatively soon.

Early forecasts suggested that it would all be over by now, with the more pessimistic estimates suggesting the end of this month. That looks unlikely. But there’s no expectation that this will go on beyond the summer, and the Brent crude forwards show a sharp backwardation, suggesting a significant pullback in oil prices by year-end.

US stock indices registered a strong performance over the last week, with gains coming in the aftermath of the ceasefire announcement on Tuesday. The S&P 500 gained 3.6%, the Nasdaq tacked on 4.7%, while the Dow and the Russell 2000 rose 3% and 4%, respectively.

Source: TN Trader

Attention now turns to the start of first-quarter earnings season, with Goldman Sachs scheduled to report Monday, followed later in the week by Citigroup, Wells Fargo, JPMorgan Chase, Morgan Stanley and Bank of America.

European stock indices gapped lower on today’s open, although, as with US stock index futures, all had recovered off their respective lows by midmorning. Investors had to consider the implications of the US naval blockade on Iran’s ports following the collapse of US-Iran negotiations.

Source: TN Trader

In addition to this, President Trump has also turned his ire back towards China. Reports have emerged that Beijing is providing Iran with military hardware and assistance. Mr Trump has threatened a 50% tariff on US imports of Chinese goods should evidence of such behaviour emerge.

In other news, in Hungary, after a 16-year run as Prime Minister, Viktor Orban conceded defeat to Peter Magyar and his pro-EU Tisza party in a landslide election result.

The US dollar was firmer across the board this morning. Safe-haven demand for the greenback strengthened following the collapse of peace negotiations between the US and Iran over the weekend.

There are also concerns that the shaky ceasefire announced last Tuesday may break down completely. This comes as President Trump announced a naval blockade of Iranian ports as a response to Tehran's continued control over shipping attempting to pass through the Strait of Hormuz.

The cash Dollar Index dropped to a five-week low on Friday, just north of 98.00. Bear in mind, it began last week, retesting resistance at 100.00. The dollar sold off as traders unwound their long ‘flight to safety’ positions as hopes emerged that the US/Israeli war with Iran may be concluding. That seems far less likely now. But traders are wary of sudden moves across FX and other risk assets should peace suddenly break out.

The stronger dollar and rising oil prices have lifted inflation expectations and prompted markets to reduce expectations for Federal Reserve rate cuts. Despite this, the market now assigns a 79% probability of no change in rates from the Federal Reserve this year, while rate hikes have been priced out completely, for now.

Source: TN Trader

Gold dropped overnight. It gapped down below $4,650, having traded within a few dollars of $4,800 at the end of last week. The selloff highlighted gold’s new-found vulnerability to geopolitical risk while destroying its reputation as a ‘safe haven’ in difficult times.

Instead, the main driver of the gold price appears to be the US dollar, as the two seem to be negatively correlated in investors' minds – a relationship which can appear solid, until it suddenly falls apart. Gold bounced off overnight lows as the European session progressed. The bulls will want to see it break and hold above $4,800 to help kick off a more sustained rally. The bears are looking for a retest of $4,400. 

Source: TN Trader

Silver also gapped lower after the weekend, breaking below $73 per ounce late on Sunday, having spent most of Friday’s session above $76. Like gold, it bounced off overnight lows and has managed to dig in above $74 so far today. The failed weekend peace negotiations between the US and Iran contributed to expectations that energy costs could remain elevated for some time to come.

Source: TN Trader

These fears weren’t helped after President Trump announced that a naval blockade on Iranian ports would come into effect later today. Mr Trump acknowledged in an interview with Fox Business that US gasoline prices could remain elevated, or higher, through to the November elections.

Crude oil prices gapped up as they reopened late on Sunday. The move saw spot Brent jump 7.4% and briefly break above $100 per barrel, while WTI added 6% from Friday’s close. The moves came after the Trump administration confirmed plans to blockade maritime traffic entering and exiting Iranian ports from today.

Source: TN Trader

The US Central Command confirmed that the blockade would apply to vessels of all nations entering or departing Iranian ports along the Arabian Gulf and Gulf of Oman, though ships travelling to non-Iranian ports would not be affected.

A look at the Brent forward curve, where crude oil for future delivery is priced, shows a market in a steep backwardation. Front-month Brent was trading around $102 this morning. That drops to $90 for August delivery, and $80 for December.

This is very steep by historical standards, suggesting that the supply issues are mostly in the short-term. As far as oil traders are concerned, this war may be in its seventh week, but it should be resolved by summer.

Bitcoin hit a three-week high just under $74,000 over the weekend. Then, news came through that negotiations between US and Iranian officials ended without a peace agreement. This was despite 21 hours of talks in Islamabad. Cryptocurrencies, along with other risk assets, sold off on the news.

Investor sentiment weakened further after President Trump announced a US naval blockade of Iranian ports, even as the two-week ceasefire remains in place, if somewhat porous.

Despite this, both Bitcoin and Ether continue to be rangebound, holding in a consolidation pattern which has been building since early February. This is helping to change investor attitudes to cryptocurrencies, which have proved to be unhelpfully volatile over the years. It’s possible that their recent relative stability could increase their popularity as an investment asset.

Volatility, as measured by the CBOE’s VIX, remains elevated but relatively steady and well below ‘danger’ levels. Global stock indices are wobbling rather than entering a full sell-off phase, suggesting equity markets may be showing some resilience to the ongoing conflict even as geopolitical uncertainty persists.

Oil remains the central focus for markets following the blockade announcement, while investors also turn attention to the start of the first-quarter earnings season, which kicked off today with Goldman Sachs.

Markets currently see little chance of Federal Reserve rate cuts this year, while expectations for a potential European Central Bank rate hike stand near 50-50, and the Bank of Japan warned of two-sided inflation risks as higher oil prices weigh on growth but push inflation expectations higher.