Headlines Around the Middle East Continue Determining Trading

Markets

The US started its own naval blockade of the Straight of Hormuz in an “open-for-all or close-to-all” policy. The move came after collapsed weekend talks between the US and Iran. Oil prices spiked higher at the start of yesterday’s trading, but the reaction in other asset classes was more guarded. Despite mutual military treats over the US decision, the fragile cease-fire still holds for now with a week to go to get parties back around the table or at least extend the cease-fire deadline allowing room for talks. Rumours suggested that back-channel talks are ongoing with Pakistan mediators. US President Trump also said that Iran reached out to his administration to still make a deal. This morning, the option of meeting again in-person on Thursday is floated either in Geneva or Islamabad. Markets eventually took these developments into stride, triggering intraday (risk-on) return action on the (risk-off) opening moves. In the case of Brent, the oil price (June contract) went from $94/b to $104/b before closing at $98. Dated Brent, for physical delivery this month rose back to $132.5/b as final prewar cargoes are set to unload in coming days. Arab officials are also pressing the US to drop its blockade over fears that Iran might eventually retaliate via Houthi rebels in Yemen (closing the Red Sea chokepoint, the Straight of Bab al-Mandeb). China is also entering the mix with Xi Jinping making 4 proposals on maintaining peace (peaceful coexistence) after meeting with the Abu Dhabi crown prince. Iran on its behalf, is asking Gulf states for financial compensation. European stock markets narrowed opening losses of around 1% into a -0.3% close while US indices extended their rebound by 0.6% (Dow) to 1.2% (Nasdaq). Sliding momentum in oil prices and positive US risk sentiment weighed on the dollar with EUR/USD closing at its best level since the start of the Middle East conflict (1.1759). The German and UK yield curves bear flattened with yields ending respectively 4.5 bps and 5.7 bps higher at the front end of the curve. This contrasts sharply with outperforming US Treasuries (2 to 3 bps down across the curve) as the intraday return action only really gained traction during the US session.

Headlines around the Middle East continue determining trading. Their volatile nature makes it hard to draw firm conclusions. Since Trump’s TACO, markets believe there’s a way out of the conflict. The IMF publishes its annual World Economic Outlook and Global Financial Stability Report. Afterwards, several central bankers are scheduled to speak including ECB President Lagarde and BoE Governor Bailey. Central bankers suggested they’ll use a more agile approach this time around to shield those upward inflation risks. They have the opportunity to give an update on their reaction functions. Even since the start of the ceasefire last week, money markets didn’t (completely) close the door on a near-term, April, rate hike especially in Europe because of elevated energy prices and the length of the shock. June action (and later) is more of a done deal.

News & Views

UK retail sales increased by 3.6% y/y in the period covering March 1 to April 4, the British Retail Consortium said in an early morning release. That’s above the 2.6% 12-month average. Food sales rose 6.8% and in-store non-food sales by 1.4%, both topping their 12-month averages as well. Online non-food sales rose by a marginal 0.1% compared to a 1% one-year average. The BRC CEO Dickinson said the early Easter provided a much-needed boost to food sales. Non-food performance was more uneven with categories such as computers, homeware and toys seeing robust demand but clothing and footwear were struggling. Dickinson noted the Middle East conflict had hit sales of travel-related goods and warned supply chains had already been damaged while rising costs (shipping, fertilizers, insurance and commodities) are pilling yet more pressure to already stretched retailers.

The Bank of France’s monthly poll showed the share of firms planning to raise prices this month had doubled from March. Some 23% of the 8500 companies surveyed are eying higher selling prices in April compared to the 11% that did so last month. Outgoing BdF governor and ECB policymaker Villeroy said its “obviously a point to follow carefully”, particularly because economic growth, for all the uncertainty lingering around, remains resilient. Selling price expectations by firms were one of the elements the ECB is “particularly attentive” to, chair Lagarde said at the March policy meeting. Villeroy added that the large majority expected the increase to be “moderate” only, suggesting limited transmission (for now at least) from higher energy prices.