Markets
In less than a week 1) an Iranian civilization was about to be wiped out 2) before Pakistani mediation resulted in a two-week ceasefire and the first high-level talks over the weekend only for the latter to 3) break down after 21 hours and bringing us de facto back to 1). After negotiations fell apart, the Trump administration announced its own Strait of Hormuz blockade – effective 4PM (our time) – to deprive Iran from its remaining oil revenue. The Middle East country responded by threatening regional ports if enemy-affiliated vessels try breaching its territorial waters. Trump afterwards upped the ante further by suggesting to go after critical infrastructure such as water and electricity plants, “which are very easy to hit.”
The market reaction to the latest developments is a kneejerk risk off one, but in a guarded manner. The ceasefire in theory is agreed to last until April 21, leaving still some (be it limited) time for de-escalation and diplomacy. News outlet Axios reported that Pakistan, Egypt and Turkey over the coming days will continue mediating with US and Iran and some negotiators, particularly from the Iranian side, kept the door open for further talks. Needless to say the situation is very unpredictable. In awaiting the outcome, stocks lose ground in Europe and the US. The likes of the EuroStoxx50 declines by 1%, Wall Street opens 0.3%-0.7% lower. Global yield curves bear flatten gently with rising oil (Brent back above $100) and gas (Dutch TTF futures +9%) driving rate hike bets. The market implied probability for an April ECB move rose from around a third to 45% with a cumulative 70 bps of rate increases priced in for 2026. German rates rise 2-3 bps, slightly underperforming vs swap and Treasuries. The latter lose minor ground, spurring 1 bp increases. UK gilts are the laggards with rates across the Channel adding 2.5-4 bps. FX investors favour the US dollar slightly over most global peers but gains are technically insignificant. DXY crawls towards the 99 barrier. EUR/USD struggles to maintain the 1.17 but is off the intraday lows. The Japanese yen is among the worst performers. A speech by BoJ governor Ueda (see below) has doused some of the lingering speculation for an April rate hike. USD/JPY is nearing the symbolically important 160 barrier again, EUR/JPY is even hitting new all-time highs. The Hungarian forint in CE space is surging towards the highest levels in four years, breaking through important resistance around EUR/HUF 367.7 (2023 HUF-highs) in the process. The move follows a landslide victory in yesterday’s elections by the pro-European Tisza party. It secured a two-third majority, giving it the power to rewrite the constitution and to some extend undo 16 years of Orban rule which often clashed with the European Commission. Hungarian (swap) rates drop almost 40 bps (!) with lower risk premia driving the move.
News & Views
The German government agreed on a €1.6bn fiscal package to contain fuel prices. Over a period of two months, the gasoline tax will be reduced by 17 cents per liter. Other, smaller, measures include a tax-free employer relief bonus of up to €1000, stricter antitrust oversight of fuel pricing and a potential tax or regulatory measures on oil companies’ excess profits. Earlier this spring, Spain (€5bn) , Italy (€3-4bn), Ireland (€1.6-1.8bn, Greece (€0.3-0.4bn) and France (€0.1-0.2bn) announced similar temporary relief measures. There’s some clear fragmentation between broad, consumer-heavy packages in Southern Europe and the more limit response in the likes of Germany and France which are either fiscally-constrained or wary of repeating huge subsidies like 4 years ago.
Japanese money markets reduced April rate hike bets by the Bank of Japan from 55% to 33% following a speech by BoJ governor Ueda read out by his deputy, Himono. He suggested that oil prices push up energy costs in the short term, but that their impact on underlying inflation is uncertain. “If the output gap worsens, that could weigh on underlying inflation. On the other hand, if rising crude oil prices heighten the public’s medium- and long-term inflation expectations, that could push up underlying inflation.” Given lingering uncertainty over the Middle East, the BoJ will scrutinize how future developments affect the outlook. While vigilance is necessary and core CPI is still on track to hit the 2% target, BoJ Ueda didn’t fully embrace the near-term rate hike scenario.
