Japan’s Nikkei hits fresh all-time high

US stock indices stormed higher yesterday. This saw fresh record closes for the NASDAQ, S&P 500 and Russell 2000. The tech-heavy NASDAQ led the rally, adding 2.0% for the session. The S&P 500 and Russell 2000 both gained1.5% while the Dow Jones Industrial Average tacked on a healthy 1.2%, although this still left it around 0.7% shy of its current record close from early February.

Source: TN Trader

The gains came on hopes that the war between the US and Iran could soon be over. This followed a report from Axios that said both sides were ‘closing in’ on a one-page memo to bring an end to hostilities.

The latest update suggests that the 14-point memorandum is being considered by Tehran, which rather infers that they weren’t that deeply involved in producing it in the first place. And President Trump sounded far from peaceful yesterday when he said that if a deal couldn’t be agreed upon, then the bombing would restart.

Despite this, it sounds as if there’s a basis for a fresh round of negotiations to take place in Pakistan. It has been suggested that the Trump administration would like these to happen before the President arrives in China next Thursday. Otherwise, Mr Trump runs the risk of looking as if he needs help from President Xi Jinping in bringing an end to his war.

But it’s fair to say that the first quarter earnings season has been a major catalyst for recent stock market gains. It has been a blow-out season by almost every measure.

According to FactSet, the S&P 500’s year-on-year blended earnings growth rate is over 27%. It is on track to be the highest growth rate since the fourth quarter of 2021. This was when the world was bouncing back after COVID shut down the global economy.  Today sees earnings updates from McDonald’s, Shake Shack, Datadog, Peloton and Tripadvisor.

It does feel as if US stock indices are in a melt-up phase. Trade feels somewhat manic, and the daily MACDs for all the major indices are in overbought territory. But it’s also fair to point out that there’s a large chunk of stocks which haven’t bought into the current euphoria, with around half of S&P 500 constituents still below their 200-day moving averages.

Having noted that, the market has come a very long way in a very short space of time. FOMO is playing an important role here, yet it’s difficult to work out what could trigger a significant pullback. That in itself is a concern.

European stock indices were more muted than those in the US this morning. Having rallied strongly over the past two sessions, bouncing back from their sharp selloff at the beginning of the week, there’s been some evidence of profit-taking today.

Source: TN Trader

Investors appear to be expressing some caution and taking some risk off the table as yesterday’s euphoria on hopes of a quick end to the US/Iran war starts to fade. While yesterday’s report of a one-page memorandum for ending hostilities is the most optimistic news for several weeks, it does look as if there are some high hurdles to jump for Tehran to accept.

Meanwhile, the pressure continues to build across Europe and the UK for each day that the Strait of Hormuz remains closed. Peace hopes also took a dent after President Trump warned that military action could intensify if Iran failed to agree to the proposed framework. Tensions were further heightened after Israel struck Beirut for the first time since the ceasefire with Hezbollah was agreed in April.

Meanwhile, earnings updates continue to come in. Oil giant Shell reported stronger-than-expected first-quarter adjusted earnings, beating analyst estimates as elevated energy prices boosted profitability.

Despite this, the stock fell over 2% after the company reduced the size of its upcoming share buyback programme. Shipping giant Maersk reported a sharp drop in net income and earnings-per-share from a year ago. Although these were largely in line with market expectations, the stock was down close to 5% in early trade. Investors continue to price in global shipping disruptions due to the effective closure of the Strait of Hormuz.

FX markets continued to exhibit some volatility today. It is now a week on from the initial round of intervention from the Japanese authorities to strengthen the yen and ward off speculators. This saw the USD/JPY drop from 160.70 to 155.60 in just five hours. The dollar subsequently bounced, pushing back up towards 158.00.

But then pulled back yesterday morning to a new cycle low around 155.00. This followed comments from Japan’s Finance Minister Satsuki Katayama warning off traders from speculating on a weaker yen.

Source: TN Trader

These moves helped to pull the rug from under the US dollar. And yesterday it came under further selling pressure as it appeared that the US and Iran may be getting closer to a peace deal or at least restarting negotiations.

The cash Dollar Index fell to 97.34, equalling a seven-week low hit on 17th April. It managed to recover some lost ground overnight but subsequently pulled back again this morning. At the time of writing, it was hovering above a mild level of support around 97.50. It could be that the US dollar is underpinned as inflation expectations pick up.

Officials from the Federal Reserve continue to warn that inflation risks remain elevated. Chicago Fed President Austan Goolsbee and St. Louis Fed President Alberto Musalem delivered some hawkish remarks yesterday.

Earlier this morning, gold edged up to hit levels last seen a fortnight ago, just a touch above $4,750. The precious metal has had a solid week so far, having rallied around 5.5% off the lows hit on Monday afternoon. Most of the gains can be blamed on dollar weakness, which is mostly due to hopes that the US/Iran war may be close to reaching a conclusion.

Source: TN Trader

Traders have been piling into the US dollar as a ‘flight to safety’ whenever hostilities heat up. This makes sense given that inflation expectations become ever more elevated by the prospect of a protracted closure of the Strait of Hormuz. But as we’ve seen, this ‘flight to safety’ into the greenback can unwind quickly, whenever there’s a sign that tensions may be dialling down.

Gold isn’t always negatively correlated to the US dollar, but it is now. This can make it quite tricky to trade in the current environment, given the Quixotic situation across the Middle East, while adding in Japan’s efforts to support its ailing currency.  

As with gold, so with silver. Silver was up for a third successive session to trade at two-and-a-half week highs, having added over 11% from Monday’s lows. Like gold, the weaker dollar and a pullback in Treasury yields helped support the metal.

Source: TN Trader

Investors continue to react to reports that Iran is reviewing a fresh US proposal aimed at ending the conflict as it gets deeper into its 10th week. President Trump has suggested that a deal is close to being agreed. But he also warned that the military campaign would intensify if negotiations failed.

On Monday afternoon, front-month (July) Brent crude hit a cycle high of $115.27 per barrel. Tensions between the US and Iran had ratcheted up after Iran accused the US of breaking the ceasefire terms by employing its Navy to escort shipping through the Strait of Hormuz. Around midday yesterday, it had slumped back to trade around $96.80, a 10-day low, and a high-to-low drop of 16%.

Source: TN Trader

The triggers for this move were, firstly, that the US abandoned its escort plan, and secondly, a report from Axios saying that the US and Iran were ‘closing in’ on a one-page, 14-point memorandum which could bring an end to the war.

Oil prices then rebounded and were a tad firmer in overnight trade as doubts were expressed about the plan. It was unclear just how much Tehran had contributed to the document.

The mood wasn’t helped after President Trump threatened to resume bombing at a “much higher level and intensity” if it rejected the proposed agreement. But oil has now turned lower again. This is helping to boost market sentiment, although the situation remains fluid and extremely uncertain.

US stock market volatility continues to ease, as investors lean towards an optimistic outlook. However, sentiment remains heavily dependent on developments surrounding the proposed US-Iran peace plan and the future of military operations in the region.

Economic data will remain in focus, with weekly Unemployment Claims, Federal Reserve commentary and Friday’s Non-Farm Payroll report expected to shape expectations for interest rates and broader market direction.

Equity markets remain supported by strong earnings, cooling oil prices and optimism surrounding technology stocks. Japan’s rally has intensified concerns about stretched valuations, while metals continue to benefit from improving risk appetite and a pullback in the US dollar.

For now, rumours, geopolitical headlines and shifting expectations around the possibility of the resumption of peace negotiations appear to be the primary drivers across global markets.