Major Asian-Pacific indices make modest gains

US stock index futures were modestly higher in early trade on Wednesday. All the majors were building on yesterday’s positive tech-led session, which saw the NASDAQ add 2% and the S&P 500 close just 11 points below its all-time closing high from 27th January.

But the US futures pulled back from their best levels after the Washington Post reported that the US was sending thousands of additional troops to the Middle East, no doubt to put extra pressure on Tehran to make a deal. This runs the risk of enraging the Iranian regime, even as it threatens and humiliates them, and thereby increases the likelihood that hostilities may continue for longer than currently forecast.

Source: TN Trader

Of course, the ceasefire deadline is less than a week away now. But as investors have seen repeatedly, deadlines can be extended, as ‘Trump Always Chicken Out’, although in this case it would seem expedient.

Aside from this morning’s activity, investor sentiment has been supported by expectations that further peace negotiations between the US and Iran look likely to take place, ideally before the (first) ceasefire deadline expires next Tuesday. President Trump has said that Iran had reached out and wanted to make a deal.

As far as financial markets are concerned, investors have priced in the expectation that the war will be over soon, and that’s certainly what the Brent crude oil forwards continue to predict, with futures prices up to year-end significantly below the current spot rate. But key to all this is not just an end to the war, but the complete reopening of the Strait of Hormuz, which remains under Iranian control.

The US continues to block shipping to and from Iranian ports in the region. Yesterday, the Chinese-linked tanker, Rich Starry, turned back before entering the Strait. But there are reports that Iranian-linked vessels have sailed through unimpeded. Investors are also watching first-quarter earnings releases today from Bank of America, Morgan Stanley and PNC Financial.

 This earnings season could prove critical in determining the near-term direction of global stock indices. If US corporations meet their lofty targets, while expressing confidence through their forward guidance, then that would go a long way to support the current bull market. If not, beware.

European stock indices were mixed in early trade on Wednesday as traders took their lead from movements across US stock index futures markets. There are hopes that a fresh round of peace negotiations between the US and Iran may take place before next Tuesday’s ceasefire deadline expires. But there is always room for the deadline to be extended to accommodate further talks.

Source: TN Trader

The Strait of Hormuz remains closed to most shipping and is still controlled by Iran. The US blockade on Iranian ports in the region continues, although its effectiveness is far from clear. Investors were disturbed by a report from the Washington Post, which stated that thousands of additional US troops were being sent to the region. But overall, investors appear convinced that the war will soon be over.

Whether the Strait of Hormuz will operate as it did before hostilities began is another matter. It’s quite possible that President Trump leaves that to Europe and China to sort out.

On the earnings front, French luxury goods brand Hermes slumped 13% in early trade. This followed a set of disappointing results with first-quarter sales taking a hit due to the hostilities across the Middle East. In the same sector, Kering lost 10% as its major brand Gucci also saw a sharp decline in sales.

Meanwhile, ASML, the Dutch lithography system maker which is so vital to the manufacture of the world’s semiconductors, released a stronger-than-expected set of earnings and revenues. In addition, its forward guidance was upbeat, despite its Chinese sales being limited due to President Trump’s ongoing trade war.

The US dollar was a touch firmer across the board this morning, bouncing back from yesterday’s lows. On Tuesday, the cash Dollar Index hit its weakest level since 2nd March, just after the weekend US/Israeli attack on Iran. Back then, investors dumped risk assets, including erstwhile ‘safe haven’ favourites gold and silver, and pushed the proceeds into the US dollar.

Source: TN Trader

The greenback may have lost some of its popularity recently as some countries attempt to wean themselves off their dependence. But it remains the world’s reserve currency, and as things stand, there’s no other currency that looks close to replacing it. Like it or not, nearly all tradeable commodities are valued in US dollars, including crude oil and other key energy products.

It is easily the deepest and most liquid currency and is the counterparty in most FX trades. But the cash Dollar Index was, yet again, unable to break through resistance at 100.00. It then showed its vulnerability.

Safe-haven demand softened as optimism rose that there could soon be a breakthrough in peace negotiations between the US and Iran. Talks are reportedly being prepared ahead of the expiry of the current two-week ceasefire next Tuesday.  

Meanwhile, yesterday’s softer-than-expected US Producer Price Index data was a welcome relief as it suggested that inflation fears could be overdone. The CME’s FedWatch Tool now puts the likelihood of a 25-basis point rate cut before year-end at 27%, up from 20% a week ago.

In the early hours of this morning, gold hit $4,870, its highest level in close to a month. It has pulled back since then, and, as lunchtime approached in London, had broken back below $4,800, which will be highly frustrating for the bulls. Gold has faced pressure from a modest recovery in the US dollar.

The cash Dollar Index fell to a six-week low yesterday as investors continued to unwind their ‘flight to safety’ trades, as they remain convinced that the US/Israeli war with Iran will soon be over. But the Dollar Index bounced this morning on a mixture of short-covering and as tensions rose after the Washington Post reported that additional US forces were being sent to the Middle East.

It’s now all about how gold behaves around $4,800. If it can push back and dig in above here, then that will encourage the bulls. But a protracted break below this level may lead to some profit-taking, following the gains made over the last three weeks.

Source: TN Trader

Silver briefly broke above $81 per ounce overnight to hit a four-week high. Since then, like gold, prices have retreated steadily and continued to fall after slicing below $79 mid-morning in London. The area around $80 is significant for silver.

If it can break and hold above here in the near term, then this may encourage some fresh buying, particularly as the daily MACD suggests that upside momentum may be building. But a failure to do so could easily, as with gold, encourage some profit-taking. That could lead to a retest of support around $70.

Source: TN Trader

Crude oil was lower overnight. In early trade this morning, front-month WTI dropped sharply towards $85 per barrel to hit its lowest level in over two weeks. The move reflected improved sentiment as investors priced in the potential for a diplomatic resolution to the Middle East conflict.

Source: TN Trader

A second round of negotiations between the US and Iran is under consideration. These look likely to take place before the expiry of the ceasefire deadline next Tuesday. But problems remain.

Firstly, the Strait of Hormuz remains closed to most traffic and under Tehran’s control. Secondly, the US is attempting to blockade Iranian ports in the region, although the effectiveness of this is being questioned. Thirdly, oil prices spiked higher during this morning’s European session following reports of additional US forces being sent to the Middle East.

Overall, there’s plenty of uncertainty over the situation, even if the general expectation is that the war will soon be over.

Yesterday afternoon, Bitcoin broke above $76,000 to hit its best level since early February. It has pulled back a touch overnight, but overall, the technical picture looks encouraging from a bullish perspective. Bitcoin is now pushing up against resistance at the top end of a range that has been building for around six weeks now.

In addition, the daily MACD has pushed up above the ‘neutral’ level, suggesting that momentum is to the upside. It’s fair to say that cryptocurrencies have had a ‘good war’, having traded with far less volatility than global stock indices over the same period. But now they face a big test.

Can Bitcoin build on recent gains and build enough upside momentum to break and hold above $80,000 in the coming weeks? If it can, then this should encourage fresh buying. A failure to do so looks likely to trigger some negative sentiment.

Market sentiment remains positive as equity markets continue to hover near record highs after erasing the earlier war-related discount. Softer US Producer Price Index data provided an additional boost for risk assets. Corporate earnings are in focus, with Bank of America and Morgan Stanley reporting today, following a lacklustre reaction to results from JPMorgan, Wells Fargo and Goldman Sachs earlier this week.

Bank earnings overall are being viewed as solid rather than spectacular, while attention is also shifting toward Netflix ahead of its upcoming release. Meanwhile, Meta and Broadcom announced a custom chip partnership, adding another development to the technology sector narrative. Geopolitical developments continue to shape the broader outlook.

President Donald Trump views the conflict as close to ending, though the US blockade in the Gulf may have knock-on effects for China and India, which receive most of Iran’s oil exports. China has described the blockade as dangerous and irresponsible, and rhetoric around the situation may become the next major catalyst for markets.