Markets Tentatively Show “a Correction on Yesterday’s Correction”

Markets

More than two weeks after the start of the military action of the US and Israel against Iran, markets yesterday apparently reached a Short term evaluation point. After adapting towards stagflationary risk due to higher energy prices at least some bad news should now be discounted. At the same time it’s almost impossible also for investors to do a more in dept economic benchmarking as visibility on the (political) outcome of this conflict and on its longer term economic impact remains very low. In this context, markets might have entered a phase where they are pushed back and forth by multiple, conflicting headlines. Yesterday, this process resulted in a brief ‘corrective’ risk-on interludium. Equites rebounded (S&P +1.01%, Eurostoxx +0.39%). Yields eased of the peak levels since the start of the war touched end last week. In this market set-up the dollar also was poised to return some of its recent gains. Especially the repricing on interest rate markets over the previous two weeks at least showed that markets understood that central banks reaction function will be different compared to Covid and to the what happened after the start of the war Ukraine. CB’s in a first reaction are expected to give more weight to trying to prevent second round inflation effects rather than focus on the fall-out on growth. However, also here markets yesterday apparently reached a first evaluation point, with long-term yields both in the US and EMU reaching important technical, psychological barriers (e.g;3% level 10-y EMU, YTD top 10-y US). In this process yields yesterday eased a few bps as markets are now look forward to some more concrete info on CB’s reaction function at the policy meetings later this week. US yields eased between 3.75 bps (30-y) and 6.2 bps (5-y). German yields in a similar move ceded between 4 bps (2-y) and -1.6 bps (30-y). On this temporary/corrective risk-on, the dollar also fell prey to modest profit taking. DXY eased off the 100.5 resistance area to close at 99.71. EUR/USD rebound from the 1.142 area to close just north of 1.15.

In the above-mentioned back-and forth process, markets this morning apparently see the glass again a bit more half empty rather than half full, with headlines this morning focusing on Iran targeting oil production facilities in the region while the US also threatens to attack key Irian Kharg oil infrastructure. At the same time, there is also little indication that political efforts (from the US) to set-up coalition to secure a passage through the Strait of Hormuz will yield results anytime soon. Markets tentatively show ‘a correction on yesterday’s correction’ with yields, oil and the dollar regaining some ground. This, rather erratic process’ might continue for some time to come. The eco calendar is thin today. We keep an eye at investors’ interest in a US Treasury $13 bln 20-y bond auction.

News & Views

The Reserve Bank of Australia raised its cash rate for a second consecutive meeting by 25 bps, from 3.85% to 4.1%. Australian inflation picked up materially in the H2 2025 with information this year suggesting that some of the increase reflects greater domestic capacity pressures. The labour market is also somewhat tighter than expected. In addition, the conflict in the Middle East has resulted in sharply higher fuel prices, which, if sustained, will add to inflation. Short-term measures of inflation expectations have already risen to a degree that that the board is judging there is a material risk inflation will remain above target for longer than previously anticipated. Uncertainty remains on the outlook with new growth/inflation forecasts available in May (56% market implied probability of 25 bps rate hike). RBA governor Bullock didn’t rule anything in or out for that meeting with the extent to which monetary policy is restrictive also being uncertain. Today’s vote was a close one (5-4) with Bullock explaining that dissenters also projected higher rates but from a timing-perspective wanted to play by the “old” rulebook of gathering more evidence before deciding on action. The 5-4 vote caused a pullback in AUD yields and AUD/USD which was later reversed during Bullock’s hawkish press conference. When asked if the board would push the economy into recession to tame prices, Bullock for example said “if it’s hard to bring inflation down then we’re going to have to deal with that.”

Japanese Finance Minister Katayama reiterated yesterday’s warning that recent currency moves have not been aligned with fundamentals. The deviation appears particularly significant at present. “Considering the impact exchange rates have on people’s daily lives, we are fully prepared to respond at any time”. She added willingness to take bold action in the strongest possible (verbal) intervention threat. USD/JPY keeps hovering around the 160-level which prompted such action in 2024. Apart from oil prices and global dollar moves, Japanese markets will also take note from the Bank of Japan which meets on Thursday. Lack of a hawkish message might spell more trouble for JPY.