Markets
What a difference one tweet makes. US President Trump claimed he had very good and productive talks with Iran and ordered a five-day pause in military strikes. Iranian officials shortly afterwards denied any such talks having happened but did confirm mediation efforts were under way by other countries including Pakistan and Turkey. It’s impossible for an outsider to know how much is true, especially considering Trump’s war tactics from the recent past. The news hitting the wires contains mixed signals as well, to say the least. Thousands of US Marines are to arrive in the Middle East on Friday, which is now considered the new deadline for the Strait of Hormuz to reopen. Meanwhile Saudi Arabia and the UAE reportedly are inching towards joining the US in the fight against Iran. It could be leverage to push Iran quicker into a deal or the prelude of another escalation in the war. Either way, we’re not seeing the likes of Brent crashing further today. Oil prices, which curiously saw major volumes shortly before Trump’s announcement, dropped yesterday from as high as $114 to an intraday low of $96 before closing around the triple digit mark. It is recovering somewhat currently towards $103. Trump’s tweet also triggered a relief rally in core bonds, with both rate hike bets and inflation concerns easing somewhat. Net daily changes amounted to up to 10 bps at the front in Germany and half that in the US. UK gilts outperformed by tanking 15 bps. We remains cautious about the extent of the recovery. Regardless of any potential short-term truce/peace deal, there are still longer-term consequences tied to the weeks long closure of the Strait, in fertilizers and as a result in food to name just one. Rising food prices have an outsized influence on inflation expectations and may still warrant rate hikes even as the geopolitical situation has improved (which is still highly uncertain, to be sure). ECB vice-president to be Vujcic said they are vigilant for second-round effects (governing council member Radev already sees some indications of that) and warned that the economy and inflation is already departing from the baseline scenario towards worst-case scenarios. Gold prices, enjoying the yield détente, rebounded exactly on the 200dMA around $4100, paring an intraday drop of 10% to just 3%. Stocks shot up sharply with the EuroStoxx50 closing 1.3% higher and similar gains for the main WS indices. The US dollar retreated in the same risk on vein. EUR/USD crawled back north of 1.16. DXY and USD/JPY fell back below 99 and to 158.4 respectively. None of yesterday’s moves are extended in Asian dealings though, (rightly, in our view) highlighting a sense of market hesitancy to go all-in on Trump’s comments. March PMI’s today lose their usual significance for trading because of the developing geopolitical situation. That’s going to be the case for most economic releases for some time to come unfortunately.
News & Views
Japanese headline inflation in Japan declined more than expected in February to 1.3% Y/Y from 1.5%. The closely watched series ex fresh food eased from 2% to 1.6% Y/Y, the lowest level March 2022 and also the first time since that reference than it fell below 2%. The underlying measure ex food and energy price still held well above the 2% reference easing only slightly from 2.6% to 2.5%. However, the decline in headline inflation was mainly due to a lower prices for regulated energy prices with utility prices easing 8.1% M/M and 5.5% Y/Y. Food price inflation printed at -0.4% M/M and 4.0% Y/Y (from 3.9%). With both the underlying inflation holding above expectations and higher energy prices at risk of pushing prices higher (including the measure ex-fresh food) coming months, the case for further BOJ policy normalization/rate hikes remains in place. Markets currently see a change of about 60% of a BoJ rate hike at the next policy meeting on April 28.
Australia and the European this morning signed a trade deal that has been negotiated for about 10 years. In essence the deal removes most tariffs for European goods as is the case for nearly all exports of Austrian critical minerals. However, the agreement still sets quotas on some Australian food products, which is drawing criticism from the local agricultural sector. The agreement comes as both parties accelerated negotiations as they were confronted with the US raising tariffs on imports while China was seen as taking a too dominant position in the supply of critical minerals. At the same time, the two parties also singed a Security and Defense partnership to address global security challenges.
