Asian-Pacific indices generally weaker

US stock index futures were modestly lower across the board in early trade on Tuesday. Tech was at the forefront of the decline, and it was noticeable that most semiconductor-related stocks were in the red, no doubt due to some mild profit-taking after their extraordinary run since the end of March.

Intel has been one of the standouts, having rallied 225% from the end of March to yesterday’s all-time high. It was down 2.7% in early trade this morning, a move which summed up this morning’s slight risk-off mood.

Both the S&P 500 and NASDAQ pulled back from the fresh record highs they managed to eke out last night. Stock market gains have been driven by an extraordinarily strong earnings season.

Source: TN Trader

Not only have the vast majority (over 80%) of S&P 500 constituents beaten their respective consensus forecasts for earnings and revenues, but as things stand, according to FactSet, year-on-year earnings growth is running above 27%, its highest level since the fourth quarter of 2021, when the world was bouncing back from Covid restrictions.

At the same time, it has become a bit of a cliché to say that investors are ‘looking past’ the US/Iran war in the Persian Gulf, although there is some truth in it. But the current ceasefire looks as if it could break down at any minute.

Given that the first quarter earnings season is winding down now, corporate results are less of a tailwind. Could it be that investors won’t take kindly to the resumption of hostilities? This looks increasingly likely now, as disagreements over Iran’s nuclear programme and the future of the Strait of Hormuz continue to dominate negotiations.

Today brings the latest CPI update for April. Headline CPI is expected to rise 3.7% year-on-year, up from 3.3% previously. Investors will want to know if higher oil prices linked to the Middle East conflict are feeding into broader inflation pressures.

European stock indices were sharply lower this morning as investors reassessed the likelihood of a near-term resolution to the US-Iran conflict. Relations between Washington and Tehran appear to be more strained than at any time since the original ceasefire was announced just over a month ago. President Trump stated that the ceasefire was “on life support”, suggesting that hostilities could resume at any time.

Meanwhile, in the UK, pressure continues to mount on Prime Minister Keir Starmer. Since his disastrous ‘reset speech’ yesterday morning, over 70 Labour Party MPs have called for him to resign or provide a timeline for his departure following poor local election results. He meets with his Cabinet this morning.

The yields on UK government bonds (Gilts) soared, with the key 10-year Gilt yield surging around 12 basis points before steadying. UK banks sold off, with significant drops in the share prices of Barclays and Lloyds. Investors expressed uncertainty over who may end up leading the UK government, and, perhaps more importantly, who may replace Rachel Reeves as Chancellor of the Exchequer, should she be defenestrated in the fall-out.

Source: TN Trader

The US dollar made gains versus all the majors overnight in response to the rapidly deteriorating ‘relationship’ between the Trump administration and the Iranian regime. President Trump’s unequivocal rejection of Tehran’s counterproposal, which followed the US’s one-page 14-point memorandum for peace, has increased the likelihood that the month-long ceasefire between the US and Iran could soon break down.

This boosted demand for the US dollar as investors once again sought out its depth and liquidity in a ‘flight to safety.’ The cash Dollar Index is once again attempting to break above resistance around 98.00.

Meanwhile, domestic political issues undermined sterling as UK Prime Minister Starmer desperately attempts to cling on to his position, for some reason. Yet despite weakness across the British pound and euro against the US dollar, both currencies found some support due to the prospect of higher interest rates. Analysts currently expect both the Bank of England and European Central Bank to hike rates by around 75 basis points each before the end of the year.

The USD/JPY pair climbed back above the 157.00 level after disappointing Japanese household spending data weakened the yen. But the dollar upside has been capped to some extent due to speculation that Japanese authorities may intervene again to support the yen if it were to weaken further.

Source: TN Trader

Gold hit a three-week high overnight, briefly breaking above $4,770 as the Asian Pacific session began. But it then pulled back sharply, dropping below $4,700 due to a bounce in the US dollar amid rising Treasury yields.

Source: TN Trader

Investors remain cautious ahead of today’s update on US inflation through the Consumer Price Index (CPI). But they have also rushed to the apparent safety of the greenback, while dumping precious metals, as a ‘flight to safety’ in uncertain times.

This move was exacerbated by concerns that there’s little hope of further US/Iran peace negotiations taking place anytime soon. In fact, the two sides appear further apart than ever, and a ceasefire breakdown can’t be ruled out.  

Meanwhile, silver also reversed sharply after a strong four-day rally. Yesterday, silver hit a two-month high when it briefly traded at $87.00. But, as with gold, sellers came in to drive prices lower overnight as the US dollar rallied on ‘safe haven’ demand.

Source: TN Trader

Rising oil prices, thanks to escalating geopolitical tensions, have revived concerns that inflation could remain elevated for longer. This has reinforced the view that the US Federal Reserve may become more hawkish this year, even as the Senate prepares a nomination vote to install Kevin Warsh, President Trump’s preferred candidate, as Jerome Powell’s replacement after the latter quits his position this Friday.

Crude oil prices continued climbing this morning after comments from President Trump suggested that the month-long ceasefire between the US and Iran may soon break down. Front-month (July) Brent crude hit its highest level since this time last week, as it pushed up towards $102 per barrel.

Last Wednesday, July Brent dropped to $88.70 before it bounced sharply. Since then, it has rallied around 15% as the situation between Washington and Iran has deteriorated significantly.

Source: TN Trader

Investors continue to monitor developments around the Strait of Hormuz, a critical global shipping route currently controlled by Iran’s Islamic Revolutionary Guard Corps. Even if the US/Iran war were to end tomorrow, and the Strait of Hormuz were immediately reopened, it could take many months, or even years, to rebuild infrastructure, restart production, and return the region back to where it was before the war broke out, even if that is feasible.

Bitcoin fell overnight, pulling back from yesterday’s high around $82,500. It fell towards $80,000, although it has yet to retest this level as support. This could become an important area over the rest of this week, particularly if geopolitical tensions continue to rise.

The Trump administration has signalled just how disappointed it is with Iran’s response to its one-page memorandum outlining its peace terms. The current ‘indefinite’ ceasefire looks as close as it has ever been to breaking down, and that has been clearly reflected in oil prices, which rallied overnight.

Could it be that cryptos become a ‘flight to safety’ trade for investors? Or could they get crushed along with other risk assets should investors decide to reduce their overall exposure to risk?

In the short term, investor focus now shifts toward the latest US inflation report due out today. This is expected to provide crucial clues concerning the Federal Reserve’s next move with regard to interest rates and the broader impact of rising energy prices on the economy.

Oil prices near the $100-per-barrel level continue fuelling inflation concerns, while negative headlines surrounding the Middle East conflict have blunted the six-week rally in global equities. Investors will also pay attention to President Trump’s visit to China this week. Discussions with Chinese President Xi Jinping are expected to centre on trade, artificial intelligence, the Middle East, global energy security and maybe even Taiwan.