Markets
Stock markets surged yesterday in response to the Axios scoop that suggested the US and Iran were nearing a deal, regardless of the ensuing contradictory statements from both warring parties. The EuroStoxx50 added 2.7% in what was its best day since the ceasefire one month ago. US equities marched up to 2% higher amid tech outperforming the rest. Asian markets are gaining too, building on yesterday’s gains. South Korea’s Kospi index thanks to the likes of Samsung and SK Hynix overtook Canada as the world’s seventh largest equity market. Japanese markets return from holidays with a huge 6% rally in the Nikkei. Oil prices fell from +/- $110 to as low as $97 before recovering back to above the $100 barrier in the close. Core bonds soared with the front end outperforming in Europe. Short term yields dropped around 10 bps as money markets reduced ECB rate hike pricing from 3-4 this year to 2-3 currently. US rates dropped 5.1-8.2 bps with the belly of the curve taking the lead. The dollar traded on the backfoot against such a constructive risk backdrop. EUR/USD sniffed at the 1.18 level compared to a sub 1.17 open and in the end closed around 1.175. DXY strongly tested support at 98, which holds for now. USD/JPY slumped to an intraday low of 155, the weakest since end-February with Japanese FX interventions having kickstarted the move lower.
A market so keen to chase positive geopolitical headlines creates asymmetric risks and oil prices keeping north of $100 suggests markets remain cautious. There’s a sense of president Trump wanting a (framework for a) deal amid spiraling domestic gasoline prices and before his meeting with Chinese counterpart next week. But he’s also threatening to restart the bombing campaign should Iran not accept the US 14-point MoU. Israel striking the not-so-southern Beirut capital of Lebanon, potentially angering Iran, only complicates matters. Yet, barring a negative response by Iran markets may continue along the lines of yesterday in a more guarded manner. As the geopolitical story develops, we are zooming in on the UK today where local elections are casting a shadow over an already bruised prime minister Starmer. Opinion polls point to heavy losses for the ruling Labour Party, potentially triggering a leadership challenge. UK markets will be on edge for what this means in terms of (a looser?) fiscal policy. The UK since Truss-Kwarteng is living proof of the return of bond vigilantes and risk premia in general. Gilts could suffer and the pound, being near important technical resistance levels around EUR/GBP 0.86, in such a case is vulnerable.
News & Views
The New Zealand economy is in the early stages of a cyclical recovery, an OECD economic survey report showed. It is supported by solid exports and monetary easing even as the outlook has come more uncertain. Growth is expected to recover gradually to 1.4% in 2026 and 2.3% in 2027. However, the recovery remains fragile as higher uncertainty and energy prices weigh on real incomes, confidence and domestic demand. Reforms are starting to address the roots of New Zealand’s chronic productivity problem, but global policy turbulence, costly and insecure electricity, ageing-driven fiscal pressures, investment gaps, shallow capital markets and limited risk capital require sustaining the reform momentum. The OECD advocates the importance of anchoring inflation expectations and maintaining the Reserve Bank’s strong operational independence, credibility and accountability. The return to a single inflation mandate strengthens clarity, but OECD says that changes and reviews of the monetary policy framework since 2019 risk undermining its credibility. It advocates maintaining stability of the mandate and remit outside scheduled five-year review cycles.
The National Bank of Poland (NBP) yesterday left its main policy rate unchanged at 3.75%. While retail sales, production and construction in March still grew in annual terms, the NBP expects Q1 growth to have slowed, as did wage growth in the private sector. Employment in the private sector is diminishing. Inflation reaccelerated compared to the beginning of the year due to higher fuel prices stemming from the conflict in the Middle East. CPI inflation in April rose to 3.2% (from 3.0% in March) and the NBP also expects core inflation to have increased in April. Against this background, and amidst uncertainty regarding future developments in geopolitical situation and their impact on the economy, the Council decided to keep the NBP interest rates unchanged. The NBP cut its policy rate by 25 bps at the March meeting. Governor Glapinski will comment the policy decision at a press conference later today. Money markets are inclined to price a rate hike in H2. The zloty yesterday strengthen from EUR/PLN 4.246 to EZUR/PLN 4.232 but that was mainly due to the global risk-rebound.
