Markets
Market rallied last Friday after Iran’s foreign minister declared the Strait of Hormuz ‘completely open’. At the same time other US (including President Trump) and non-US sources suggested that a deal on the nuclear program could be within reach.. Brent oil temporary dropped below the $90/b mark (close $90.4). The three major US equity indices (Dow, S&P 500 & Nasdaq) all closed at new historic top levels. The Eurostoxx 50 isn’t at that point yet, but also added 2%+ to close at 6057,71. Even as a return to normalcy in energy supply would still take quite a long time, even in case of an agreement, interest rate markets further priced out central bank rate hike probabilities as an oil price (well?) below $100/b provides time to assess potential long-lasting inflationary effects. US yields eased between 7.2 bps (5-y) and 4.9 bps (30-y). EMU interest rate markets outperformed with Bund yields tumbling between 10.9 bps (2-y) and 5 bps (30-y). Money markets almost fully priced out any probability of an ECB rate hike next week and see less than two 25 bps rate hikes by the end of the year (+/- 38 bps discounted). The dollar initially declined sharply on the overall optimism with DXY temporary tumbling below 98 and EUR/USD reaching the 1.185 area. However, the US currency soon regained ground to close little changed (EUR/USD 1.1765; DXY 98.10).
The weekend showed that the optimism on Iran and the US reaching a mutually acceptable deal isn’t as evident as was suggested on Friday. Iran isn’t prepared to meet the US conditions on its nuclear program and the Strait of Hormuz de facto proved not to be (‘completely’) open. The situation further escalated as the US seized an Iranian ship in the Gulf of Oman clouding the prospects for new talks between the US and Iran that were hoped to take place ahead of the ceasefire deadline Tuesday evening. US president Trump even repeated his threat that the US might attack Iran infrastructure if no deal is reached. From a market point of view, trading is again heading for a period of limited visibility going into the ceasefire deadline of Tuesday evening. Even so, the reaction on Asian (equity) markets this morning remains orderly. Most indices even trade with, admittedly way smaller, gains compared to the US and Europe on Friday (e.g. Nikkei + 0.57%). US yields are rebounding 1.5-2.5 bps across the curve. ST EMU yields add up to 5 bps. Brent oil returns to $95/b. Interest rate markets still hold the view that oil prices sub $100/b give central banks time to assess the impact of current developments. The dollar regains some further ground (DXY 98.35; EUR/USD 1.175). Trading will probably again be driven by headlines on the Middle East conflict. Markets still take the working assumption that the parties will try to avoid an outright new military escalation. Aside from the conflict in the Middle East, the eco calendar is thin today. We keep an eye at the appearance of UK PM Starmer to the House of Commons on the appointment of Peter Mandelson as US Ambassador, which might raise pressure on his position as PM. EUR/GBP sticks just above 0.87.
News & Views
Rating agency Moody’s stripped Belgium of its Aa3 rating, downgrading it to A1 with a stable outlook. It shadows the decision by Fitch last year which was the first (ever) of the big three rating agencies to lower the rating below “AA” category. Moody’s decision reflects three interrelated developments that relate to the fiscal outlook, growth perspectives and Belgium’s institutional set-up (the year-end 2025 budget process showed the limits of politically possible fiscal consolidation). Modest medium-term growth, higher interest expenses and structural increases in expenditure due to the social risks associated with ageing as well as defence have compounded an already-challenging government budget picture. Under Moody’s baseline, fiscal deficits remain high at around 5% of GDP. Debt-to-GDP is increasing despite significant consolidation measures that have been undertaken by the government. The rating agency projects debt to rise to 116% of GDP by 2030 from 104% in 2024. Trend growth will remain well below the average growth rate of around 1.5% over 2010–2019, pointing to a structurally weaker growth environment than the one that supported Belgium’s fiscal profile in the past.
The Wall Street Journal reports that the United Arab Emirates opened talks with US Treasury Secretary Bessent on the idea of an FX swap line. Such financial backstop isn’t needed at the time, but there’s concern that the war could inflict major damage on its economy (damaged energy infrastructure and inability to transit Hormuz) and its position as a global financial hub, depleting foreign reserves and triggering a money drain. According to officials cited by the WSJ, Emirati officials also told US officials that if the UAE runs short of dollars, it may be forced to use Chinese yuan or other countries’ currencies for oil sales and other transactions..
 open.){kind=link}