Asian-Pacific stock indices mixed

US stock index futures were firmer across the board in early trade on Wednesday. All the majors were trading at, or very near, record highs. Yesterday, the Dow lost 0.2% but still looks relatively comfortable digging in above 50,000. But the stars of the show were the tech-heavy NASDAQ and the small-cap Russell 2000, which added 1.2% and 1.8%, respectively.

Source: TN Trader

Micron Technology surged 19% during Tuesday’s session, pushing the company’s market capitalisation above $1 trillion for the first time. US equities appear to be benefiting from a very strong earnings season. Stocks have certainly felt a tailwind as company after company announced results which blew past consensus estimates.

According to FactSet, the year-on-year earnings growth rate for the first quarter is on track to be its strongest since the fourth quarter of 2021 as the world bounced back from the Covid shutdown. This then raises a question: will that tailwind now fade as the earnings season winds down, and as analysts question if this rate of growth can be maintained?

Obviously, the tech sector is crucial in all this, and it has been encouraging to see some ‘overlooked’ chip-related corporations play catch-up to the market leaders. But it’s also worth considering NVIDIA, which has lost around 3% since announcing a stellar set of results this time last week. That’s unusual.

In other news, there has been a lot of mixed messaging around the US/Iran war. Investors went into the long holiday weekend seemingly convinced that a peace deal was about to be announced. Yet they started trade yesterday, hearing that the US had attacked missile launch sites and mine-laying vessels around the Strait of Hormuz, apparently following Iranian provocation.

But the market continues to look past current events, suggesting that most investors still expect the war to be over soon. Yet here they are, in week seventeen, and the Strait of Hormuz remains closed to anyone that Tehran doesn’t like.

European markets opened higher on Wednesday, helped along by another pullback in oil prices. Unlike their US counterparts, the major European indices have yet to hit a consecutive string of all-time highs. But you’ve got to give them credit for trying. The Euro Stoxx 50 and German DAX continue to outperform.

In futures trade on Monday, the Euro Stoxx hit its highest level since the US and Israel attacked Iran at the end of February. Meanwhile, the DAX has now surpassed that and has its all-time high from January firmly in its sights.

In a display of UK exceptionalism, the FTSE 100 continues to struggle in comparison, and it is currently over 3% below its own all-time closing high, which was hit the day before war broke out.

Source: TN Trader

It can be argued that European and UK markets have far greater exposure to the war than the US. This is due to their dependency on the energy and chemicals coming from the Persian Gulf and the region in general. In this regard, the US is fairly self-sufficient and has neighbours, Canada and Mexico, to supply it with the stuff it doesn’t have already.

On top of this, the US has tech, something that Europe dislikes and that the UK could do well in, should the regulatory shackles, building regulations, and energy taxes, etc., come off.

FX markets had a quiet start to Wednesday’s session, with most pairs trading in relatively tight ranges. The US dollar continues to consolidate. Twelve days ago, the cash Dollar Index poked its nose and traded above 99.00 for the first time since early April.

Since then, it has held around here, trading either side of this level, and spending most of its time between 99.20 and 98.80. This has seen its daily MACD flatten out, suggesting a loss of upside momentum. This could mean that the greenback is about to give back gains made over the last three weeks.

Or it could suggest that the dollar is building enough upside momentum to launch another attack at the 100.00 level, which has offered up significant resistance in the past.

It’s worth noting that the dollar has proved resilient, even as Treasury yields have dropped sharply since the end of last week. Considering interest rate differentials, there’s not a lot of difference in interest rate expectations across the major central banks now, with all expected to raise rates this year. It’s more a question of timing.

Bank of Japan Governor Kazuo Ueda hosted a meeting of central bankers and warned about the inflationary ramifications of even a temporary increase in energy prices. The BOJ is expected to raise rates next month. But the yen is under pressure for domestic reasons.

Source: TN Trader

Yesterday, Isabel Schnabel of the European Central Bank said that an interest rate hike in June would be necessary, even if the US and Iran reach a peace deal. The Federal Reserve is also expected to raise interest rates, but later this year.

Gold broke below $4,500 overnight to trade at its lowest level since this time last week. At the beginning of this month, gold looked as if it had found its feet again as it rallied up towards $4,800. But it has struggled over the past fortnight as the US dollar has strengthened and as Treasury yields surged higher on inflationary fears, and speculation of rate hikes this year from the US Federal Reserve.

It’s difficult to see what will happen next. If there were to be an end to the war between the US and Iran, then that would suggest that the US dollar may face some selling pressure (as traders exit their ‘flight to quality’ trade), which should boost gold. On the other hand, gold may need to retest support around $4,400 before it does anything significant.

Source: TN Trader

Silver is in a similar situation. It too has been weighed down by US dollar strength and the prospect of a US rate hike later this year. It found some support around $75 overnight, but it still looks vulnerable to further selling.  There are growing concerns that central banks may keep borrowing costs higher for longer than previously expected, to combat inflation risks linked to energy supply disruptions.

Source: TN Trader

Traders went into the long holiday weekend with many convinced that the US and Iran would agree on peace terms. Instead, yesterday morning, the US attacked Iranian positions and ships around the Strait of Hormuz, claiming that they were provoked by Iran’s Islamic Revolutionary Guard Corps. Despite this, there are persistent hopes that the war may soon come to an end, even as it enters its seventeenth week. 

Crude oil prices were lower in early trade on Wednesday. The pullback came even as traders focused on renewed military tensions around the Strait of Hormuz. Yesterday, it was reported that the US had launched a series of attacks on Iranian missile launch sites and mine-laying vessels in and around the Strait of Hormuz.

Tehran accused the US of breaking the ceasefire, which has been in place since early April. The US said it was responding to provocation from Iran’s Islamic Revolutionary Guard Corps.

Yet these hostilities followed directly after the long holiday weekend, when investors speculated that the US and Iran would announce that negotiations had made significant progress. Perhaps that was wishful thinking.

There’s no doubt that investors are keeping a close eye on oil prices and using them as a basis for investment, or perhaps, trading decisions. Yet the oil markets have led investors astray. The initial rally, which followed the US/Israeli attack in Iran at the end of February, really didn’t take full account of energy supply disruptions. That was only fixed a week later.

Likewise, crude oil forwards have persistently forecast a quick end to the war, and yet it's now in its seventeenth week. In the meantime, US stock indices power on the fresh all-time highs, seemingly indifferent to the price of a barrel of oil.

Source: TN Trader

Bitcoin remained under pressure midweek as risk appetite across the cryptocurrency sector continued to deteriorate amid geopolitical uncertainty and fading bullish momentum. Despite this, Bitcoin continues to hold above support around $75,000, although it has shrugged off strength across other risk assets such as US tech stocks.

Markets are expected to remain highly sensitive to geopolitical developments, particularly any updates surrounding the US-Iran ceasefire negotiations and the future of the Strait of Hormuz. Tech earnings and artificial intelligence-related investment trends continue to provide strong support for equity markets.

Volatility, as measured by the VIX, continues to be subdued even as investors balance optimism around diplomatic progress in the US war with Iran against the risks of renewed military escalation and persistent energy market disruptions.


* 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.