Markets Overnight Again Had to Cope With a TACO-Like U-Turn

Markets

Markets overnight again had to cope with a TACO-like U-turn regarding the conflict with Iran and the impact on the on energy supply affecting the global economy. Pakistan (PM Shehbaz Sarif) proposing a 10-point plan from Iran to the US apparently ‘convinced’ the US not to start a devastating attack on Iranian infrastructure and to agree to a 2-week ceasefire. Demands from both sides as put down in an earlier US-15 point plan and a new Iranian plan suggest that high hurdles have to be overcome. Even so, president Trump accepted the proposal as a workable basis to start negotiations. One of many key points that still have to be resolved/clarified is the framework on the reopening of the Strait of Hormuz. The US sees a complete, immediate and safe opening of the Strait as part of the ceasefire agreement. Iran from his side mentions that ‘for a period of two weeks, safe passage through the Strait of Hormuz will be possible via coordination with Iran’s Armed forces’. How this (and multiple other unresolved topics) will turn out both political and logistically still has to become clear. Even so, for markets the ceasefire trigged a logical Pavlov decompression move. After a modest rise early in US dealings, US yields already drifted gradually lower on rumours that Pakistan was actively working on a proposal. US yields already closed the session lower between 6 bps (2-y) and 1.6 bps (30-y). This morning the easing continues in an extended bull steepening move (2-y minus additionally 6.5 bps, 30-y minus 2.6 bps). At the close of the European markets, tension/fears of an escalation still were riding high with Bund yields closing between 10.8 (5-y) and 6.7 bps (30-y) higher. US equities yesterday closed the session little changed. The EuroStoxx 50 lost 1.05%. Already yesterday in the pre-ceasefire era, the dollar hardly profited with DXY closing well below the 110 barrier (99.86). Idem for EUR/USD (close 1.1595).

This morning’s relief after the ceasefire lifts all/multiple boats in a broad risk-on move. Asian equities jump sharply higher (Nikkei +5.45%, Kospi +7%). Brent oil tumbles form $110+ p/b levels yesterday to currently hovering near $94 p/b. The dollar eases further (DXY 98.75, EUR/USD 1.1685). We also keep a close at the re-evaluation on European interest rate markets. Yesterday, rising inflationary risks pushed expectations for a an April ECB rate hike close to 70% with cumulative 75 bps tightening discounted from the end of the year. To what end will the ceasefire make markets question that the impact of the recent developments already pushed price developments in line with the adverse scenario which they saw creating (pre-emptive) ECB action? In a scenario of oil holding in the $90-$100 range and plenty of political and logistical issues still to be solved, interest rate markets might still keep a scenario of at least two ‘pre-emptive’ ECB rate hikes in a not-that distant future. Given recent modest USD gains considering the level of tension, there is room for EUR/USD to move higher in the 1.14/1.18 ST trading range.

News & Views

The Reserve Bank of New Zealand (RBNZ) held its policy rate unchanged at 2.25% this morning. Since its February meeting, events in the Middle East materially altered the outlook and balance of risks. The RBNZ didn’t completely update February forecasts for inflation but gave an indication for the short term by raising the prognosis for Q1 2026 and Q2 2026 respectively to 3% (from 2.8%) and 4.2% (from 2.7%). Today’s decision balances the potential benefits of responding pre-emptively to the risk of higher medium-term inflation against the cost of unnecessarily stifling the economic recovery. The Monetary Policy Committee is nevertheless vigilant to any generalized inflationary pressure and stands ready to act to return inflation to its medium-term target. Any signs of significant second-round inflationary effects or increases in medium-term inflation expectations would require decisive and timely increases in the policy rate to re-anchor inflation expectations. For now, the central bank believes that weak demand and spare productive capacity should constrain the degree to which higher costs can be passed on. It eyes the magnitude and duration to the disruption to global supply chains and energy markets and the way they influence price- and wage-setting behavior. The kiwi dollar extends cease-fire gains against USD after the hawkish hold with NZD/USD rising from 0.5730 to 0.5830.

The Reserve Bank of India left its policy change unaltered at 5.25% and kept a neutral stance, retaining flexibility to respond judiciously to incoming information. It is vigilant to upside inflation risks linked to the intensity and duration of the conflict in the Middle East and the resulting damage to energy and other infrastructure. CPI inflation for 2026-27 is projected to be at 4.6% with Q1 at 4%; Q2 at 4.4%; Q3 at 5.2%; and Q4 at 4.7%. The RBI has a 4% inflation target with a 2%-6% tolerance band.