Markets
So much for the initial cautious trading session going into a weekend that centers around a second round of US-Iranian talks. Axios during European afternoon trading cited sources in reporting that both countries are negotiating a cash-for-uranium deal, releasing $20bn in frozen Iranian funds in return for giving up its stockpile of enriched uranium. Iran’s nuclear program has been one of the thorny issues in the ongoing talks and the Axios report suggests the warring parties are at least trying to iron out their differences rather than digging in. A second critical topic is, of course, the Strait of Hormuz. Shortly after the Axios report, Iran’s foreign minister Araghchi declared the passage “completely open” for all commercial vessels with the important nuances that it is “on the coordinated route as already announced by Ports and Maritime Organisation of the Islamic Rep. of Iran” – which at some point might bring up the under international maritime law illegal Tehran tollbooth matter – and “for the remaining period of ceasefire”. A workaround for the former could be found in the 1936 Montreux Convention that deals with the Turkish straits and there have been rumours of backchannel diplomacy massaging parties to add another two weeks to the truce. Arab and European leaders yesterday told Bloomberg that a deal could take up to six months though, offering markets a reality check. But optimism is now back in full swing.
Brent oil falls almost 10% towards and even below the $90 barrier. Dutch natural gas (TTF future) loses 8% to trade back at the (higher) €38/MWh opening level following the first US/Israeli strikes that landed on Iranian soil. The EuroStoxx50 is rallying 2%+, reclaiming the 6k mark for the first time since the conflict erupted. US indices open more than a percent higher. European swap yields tumble 5 (30-yr) to 10 bps (2-yr). ECB tightening bets drop sharply. April is all but priced out (7%) and there are no longer two full rate hikes priced in for the year (43 bps compared to 55 bps just prior to the Axios-Araghchi combo). The 10-yr swap tries to hold on the 3% barrier. US Treasury yields ease 6.8-8.5 bps across the curve, the belly outperforming the wings. Gold jumps to a post-war high of $4880, as does silver at $81.2. The US dollar’s search for a near-term bottom (amid stabilizing oil prices) is in vain. The greenback takes a one-two punch, lifting EUR/USD to the highest level since mid-February around 1.185. The trade-weighted DXY loses the 98 barrier (97.64) with room, technically, for a further correction to 97 and 96.
News & Views
The International Air Transport Association’s assessment of potential jet fuel shortages is sobering. They estimate to start seeing some cancellations in Europe by the end of May for lack of jet fuel. This is already happening in parts of Asia. “Along with doing everything possible to secure alternative supply lines, it’s important that authorities have well-communicated and well-coordinated plans in place in case rationing becomes necessary, including for slot relief,” said Willie Walsh, IATA’s Director General. EC spokesperson Itkonen also today said that the EU will be preparing to launch possible coordinated action as regards jet fuels. So far, the market is managing the tightness without shortage but issues may arise in the near future.
Czech National Bank board member Kubicek believes that a rate hike is currently more likely to be the central bank’s next move, but it’s not necessary to expect it right away. Kubicek was already contemplating a rate hike ahead of the Iran war because of the massive growth in loan and mortgages. Now he takes a tightening of financial conditions and downside economic risks into stride and balances it against the risks of second round inflation effects. He doesn’t think that the current 3.5% policy rate is too restrictive. Strong growth, increasing real wages and sticky core inflation (2.9% Y/Y) all warrant such stance.
