Asian-Pacific stock indices end mixed

US stock index futures were little changed in early trade this morning. This follows yesterday's modestly negative session which saw both the Dow and S&P end 0.1% lower, while the NASDAQ and Russell 2000 lost 0.3% and 0.6% respectively. Equities were held back by a sharp rally in crude oil which has continued into this morning's trade.

Source: TN Trader

This comes after Iran stated on Sunday that no direct negotiations were taking place between the US and Tehran, and that nothing could be decided concerning the reopening of the Strait of Hormuz, while ensuring the safety of vessels looking to navigate through the Bab el-Mandeb, until the US stuck to the points agreed in the memorandum of understanding signed in June.

This would include lifting the US naval blockade of Iranian ports around Hormuz and the Persian Gulf. In the meantime, Iran is demanding compensation from the US, and the US is demanding compensation from Iran.

This week, investors are also focusing on US inflation. The latest CPI update comes out tomorrow, with PPI on Thursday. Last month saw a slight softening in inflation pressures, although this was from elevated levels, and all US inflation measures continue to come in well above the Fed's 2% target.

Despite this, should there be another set of numbers indicating a continuation in the softening of pricing pressures, then that would take some pressure off the Fed, reducing its need to raise rates before year-end. Of course, Friday's Non-Farm Payroll report has really put the cat amongst the pigeons. This was a dismal set of numbers, compounding the unexpectedly weak data from the prior month.

In addition, there were significant downward revisions to the previous two updates, along with a drop in the Participation Rate. All-in-all, the Federal Reserve is hardly likely to raise interest rates with poor labour market numbers like these. For a start, the data suggest that there's some weakness in the US economy becoming apparent.

We also know that President Trump wants rate cuts. Rounding this off, raising rates to bring down inflation due to high oil prices doesn't help anyone. All it does is raise borrowing costs when people are already having to deal with higher energy costs. As is often said, the cure for high oil prices, which are generally a temporary phenomenon, is high oil prices.

Despite this, the CME's FedWatch Tool puts the probability of at least one 25-basis point hike before year-end at 81% - slightly down from 90% at the end of July.

European equities traded cautiously as investors balanced additional gains in crude oil against a supportive cross-asset backdrop following last week’s unexpectedly weak US payroll figures.

Source: TN Trader

The slight drop in expectations for Federal Reserve rate hikes following the weak US payroll report have supported equities. But rising crude oil prices due to renewed uncertainty over the US war with Iran, and further delays in reopening the Strait of Hormuz, have introduced fresh inflation risks. This has meant that the probability of at least one 25-basis point rate hike from the Fed before year-end remains extremely high at around 80%.

Investors are calculating that the Fed is far more worried about oil-led inflation than it is about underlying weakness in the economy which is showing up in a rapidly deteriorating labour market. Something has got to give. Could it be that the market suddenly starts pricing out rate hikes and pricing in rate cuts, in a complete inversion of what happened earlier this year?

The US dollar was firmer across the board this morning, although the gains were certainly modest. Despite this, today's price action was evidence of the dollar's resilience, even as investors question the Fed's appetite for raising rates before the year-end.

Fed members have repeatedly spoken about the stubbornness of US inflation and the central bank's struggle to get it back below its 2% target. This has meant that the other part of the Fed's dual mandate, maximising employment, has taken second fiddle to maintaining price stability.

But following Friday's terrible payroll update, which, we should remember, means that there have now been two major disappointments in a row (not to mention the thumping downside revisions to the last two months' numbers), the US labour market is back in focus.

The next Fed monetary policy meeting is mid-September, meaning that there will be one more government payroll update before then. But now all eyes turn to this week's US inflation updates, with CPI tomorrow and PPI on Thursday. If these continue to soften, then that will significantly reduce the pressure on the Fed to hike rates this year. But if inflation rebounds again, then the Fed will find itself in a very difficult position.

Meanwhile, it's just under a fortnight since the US and Japan jointly intervened to support the yen and push the dollar lower. This looked relatively successful initially, as the USD/JPY dropped from 164.00 to 155.00 over the following week. But it is now trading around 159.00, suggesting that investors are questioning the appetite, and resolve, of US and Japanese policymakers to have another go. While this intervention has worked better than April's, it has had nowhere near the effect of the one in the summer of 2024.

Source: TN Trader

In the early hours of this morning, gold hit a fresh nine-week high, pushing up above $4,435 per ounce. But it then reversed direction, slipping below $4,400 and coming within easy reach of $4,350 at the start of the European session.

Just under a fortnight ago, gold was trading below $4,000. So, it has added an impressive 10% since then, in a move which has clearly got the gold bulls excited once again, after six solid months of bearishness. Of course, it got quite a boost from the selloff in the US dollar due to the joint intervention of the US and Japan to support the yen.

Source: TN Trader

The question now is if that simply provided the catalyst for the current rally or is a weakening dollar an absolute necessity for gold (and silver) prices to continue their upward move?  Either way, both gold and silver look as if they need to correct a touch, or at least consolidate, given how far, and how fast, both have risen.

Source: TN Trader

The next big tests come this week with tomorrow’s CPI and Thursday’s PPI providing further insights into US inflation. As mentioned above, the Fed will be hoping for another indication that inflation is coming down towards its target.

Otherwise, the central bank will have to reconcile higher inflation against a deteriorating labour market as it decides what to do with interest rates. Add in uncertainty across the Middle East, rising oil prices, a surging stock market and a meddling President and Kevin Warsh must be wondering why he wanted to be Fed Chair so badly.

Oil prices jumped around 1.5% in early trade on Tuesday, to hit their highest levels since the end of July. This came after both Brent and WTI surged over 5% on Monday, as hopes for an agreement between the US and Iran to reopen the Strait of Hormuz faded.

Source: TN Trader

Last week, US Treasury Secretary Scott Bessent had suggested that the two sides were close to a deal. But hopes for a breakthrough in peace talks were shot down on Sunday after Iranian Foreign Minister Abbas Araghchi said there was “no possibility of restarting negotiations”, as the US continued to violate conditions agreed in the memorandum of understanding signed back in June. This would include the US navy's ongoing blockade of Iranian ports across the region.

Meanwhile, Tehran and the Trump administration both insist that they are owed reparations from each other. So, as things stand now, it feels as if both sides have some work to do to return the Strait of Hormuz back to its pre-war state, assuming that is even possible.

Bitcoin was a touch weaker in early trade on Tuesday. But it showed signs of steadying after yesterday's selloff. Bitcoin pushed above $65,400 over the weekend, a level which appears to be acting as mild short-term resistance. But it dropped sharply yesterday afternoon, breaking below $64,000.

It looks as if traders wanted to cut their summer exposure due to disappointment that the Clarity Act didn't come up for a vote, with the next opportunity coming in September. Sentiment wasn't helped by news that Michael Saylor's Strategy, the world's largest corporate holder of Bitcoin, disclosed that it had sold more of its holdings - its fourth bitcoin sale this year - to restructure its holdings and boost its cash position.

Markets are focused on the oil price and tomorrow’s US CPI report, which is expected to provide the next major test of Federal Reserve rate expectations.

Headline inflation is forecast to rise 0.1% in July after falling 0.4% in June. A stronger-than-expected reading could reinforce expectations for higher interest rates, particularly if rising energy prices begin feeding into broader inflation measures.

The Producer Price Index on Thursday will provide another important input into the inflation outlook, while investors will also monitor Treasury yields and any comments from Federal Reserve officials.

In the meantime, developments surrounding the Strait of Hormuz remain a key market driver. The failure to reach a swift agreement between Washington and Tehran means further shipping disruptions and upside pressure on oil prices, increasing pressure on inflation-sensitive assets and central banks.

For equities, the continued strength of AI-related demand remains an important counterweight to geopolitical and inflation risks. TSMC's 45% increase in July sales and Nvidia's new initiative to mobilise more than $500 billion for AI infrastructure suggest that the underlying investment cycle remains strong, even as investors continue to question valuations and financing costs.

* 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.