Swissquote: Is the 40th time the charm?
By Ipek Ozkardeskaya, Senior Analyst, Swissquote
The Middle East could be progressing toward a concrete peace deal. And this time it could be real, as the Pakistani PM announced this weekend that the US and Iran had reached an agreement to end the conflict and reopen the Strait of Hormuz by Friday.
It was his first announcement (versus 39 announcements of a peace deal by US President Trump since the conflict began three months ago according to Bloomberg). As such, markets are taking the news seriously. US crude fell 4.5% in Asia to $80pb – by far the lowest level since the first days of the war – and global equities rallied with joy. The Nikkei rose nearly 3% to a fresh record high, while the Korean Kospi index rallied more than 5%, close to a record high.
European and US futures are firmly in the green into the European open, as the decline in oil prices could prove sustainable and lead to easing inflation expectations globally, and a softer monetary policy stance across central banks. The US 2-year yield is down to 4% this morning, reflecting that thinking. Of course, some remain sceptical regarding the upcoming peace deal as:
1) Trump couldn't help but tell the New York Times on Sunday that if an agreement isn't reached on the nuclear deal, the attacks would continue; and
2) Israel has gone totally out of control.
But as long as oil prices remain in check, markets’ geopolitical concerns will ease. That's great news heading into a week full of major central bank meetings. The European Central Bank (ECB) raised rates last week for the first time in more than three years to fight rising inflationary pressures – without much hope that doing so would help ease those pressures. Today, if oil prices ease sustainably, they could achieve their goal without causing additional trouble for European economies.
The Reserve Bank of Australia (RBA) has been raising rates to slow price pressures. Australian policymakers are expected to sit on their hands at this week's meeting and see how economic data evolves. The Bank of England (BoE) and the Swiss National Bank (SNB) are expected to maintain their policy rates unchanged as well this week, albeit for completely different reasons.
- The BoE is trying to buy some time as inflation came in softer than expected in the latest print, but is likely to spike when the energy price cap is readjusted. With a little luck, global energy prices could ease to temper price pressures and reduce the need for future rate hikes while the economy is suffocating under the heavy weight of the country's fiscal constraints. Those constraints are largely the result of past political decisions that have left a country with anaemic productivity and growth little choice but to limit spending, at a time when investors are demanding increasingly higher returns to hold British debt. Note that UK GDP contracted in April, as expected.
- The SNB, on the other hand, saw Swiss inflation rise to 0.6% y-o-y – well below its 2% policy target – and feels no urgency to raise rates. On the contrary, watching other major central banks raise rates may help soften the franc, which would be welcome if oil prices came down at the same time.
Then we have two other meetings that deserve greater attention:
- The Bank of Japan (BoJ) is due to announce its policy decision tomorrow and would be better off raising rates while USDJPY is persistently trading above the 160 level, even with a broadly softer US dollar across the board on falling oil prices.
- The Federal Reserve (Fed) will announce its latest decision on Wednesday. The world's most important central bank is widely expected to leave policy unchanged, but the meeting will be closely watched as it marks the first meeting of Kevin Warsh as FOMC Chair, and there will be a dot plot.
Kevin Warsh is taking over a divided Fed. Remember, in April, the Fed decided to hold rates steady, but the decision was based on a very unusual vote split: 8-4 (with four members wanting to raise rates). Therefore, Warsh's first accompanying statement will set the tone regarding the Fed's overall policy outlook.
We know that Kevin Warsh favours lower rates and, with a permanent peace deal in the Middle East and declining oil prices, he will likely argue that the recent spike in US inflation could be temporary, reopening the door to rate cuts – or at least easing concerns about a late-year rate hike. If that's the case, and alongside falling oil prices, we could see the greenback soften against most major currencies this week.
Indeed, the EURUSD is sharply higher this morning on Middle East peace hopes, and a return above the 50-, 100- and 200-DMA range (1.1675/1.1685) now looks plausible. Cable has already surpassed its 200-DMA and is preparing to test the 50- and 100-DMA (1.3470/1.3475). The outlook is more neutral for GBPUSD between 1.33 and 1.36 on the prospect of a softer BoE message and an improved Middle East outlook.
In precious metals, gold and silver are rebounding this Monday, boosted by lower yields that decrease the opportunity cost of holding non-interest-bearing metals. Both metals have come off significantly from their January highs, but both remain well above their long-term bullish trends, meaning that their prices are still vulnerable to shifts in global risk sentiment. For gold, that means the precious metal is not yet ready to reclaim its safe-haven status.
In equities, the SpaceX IPO on Friday went very well. The stock exploded 30% higher at the open and closed the day around 20% higher, with a valuation of more than $2 trillion – a bit stretched for a company that is still bleeding money and does not yet have the technology to turn its space ambitions into reality within a reasonable timeframe. In comparison, Amazon, worth around $2.5 trillion, generated more than $700 billion in revenue last year.
But hey, SpaceX may get the funding it needs to try – on its investors' shoulders. To the question, should anyone invest? My answer is that SpaceX is not an investment in traditional terms. You don't invest to receive a predictable return. It's more like a bet – a bet on something that could be hugely promising, but that also carries a meaningful risk of failure.