Another month ended with no light at the end of the tunnel for the Iran war. On the contrary, the US is not willing to lift the naval blockade in the Strait of Hormuz, while Iran says it will not give up its nuclear programme and will not come to the negotiating table unless the US lifts the blockade. We’re repeating the same lines every day.
Meanwhile, the near-closure of the Strait of Hormuz keeps the oil market tight. Trump downplays rising oil prices, arguing that there is plenty of oil – but blocked in the Strait – and that prices will fall like a rock once the issues are resolved. But when will that be? No one knows.
This is the takeaway from this week’s central bank meetings: the Federal Reserve (Fed), the Bank of Canada (BoC), the European Central Bank (ECB) and the Bank of England (BoE) all left rates unchanged, but their policy outlook was more or less aggressive. The ECB decision, for example, initially came across as dovish, until Christine Lagarde said a rate hike was discussed and could come as soon as June, depending on the data. That’s the issue: recent data confirmed that the energy shock slowed European growth to near zero in Q1 while pushing inflation to 3%. The question is whether energy-led inflation will spill over salaries and broader economy. If it does, the ECB must act.
The ECB’s tone brought euro bulls back in. The EURUSD extended its recovery above the 100-DMA, while benchmark EU 10-year yields fell and the Stoxx 600 jumped 1.38%, helped by a sharp correction in oil prices. With no clear trigger, the move likely reflects positioning and the re-emergence of the ‘demand destruction’ narrative as oil approaches $120pb.
This is not a hard ceiling. A prolonged conflict could eventually break above $120pb, but yesterday’s retreat in oil supported equities, alongside earnings.
Strong earnings – especially from banks and energy – boosted the Stoxx 600, mirroring the US.
In the US, major indices hit fresh record highs on AI optimism. The Dow Jones gained 1.62%, led by Caterpillar, which beat estimates with a 22% rise in Q1 revenue, supported by data centre and power infrastructure demand. The company reported a record $63bn backlog, up nearly 80% year-on-year. The AI boom may be displacing some jobs, but it is creating others. Some expect AI spending to reach $1tn next year, with Big Tech alone projected to spend over $700bn this year – potentially rising to $800–900bn.
As we enter May – traditionally a softer month – earnings resilience continues to offset geopolitical and inflation concerns.
US data showed Q1 growth slowing to around 2%, while price pressures eased. This pushed the US 2-year yield lower, with the 10-year falling below 4.40%.
US futures point to a positive open, while many European markets are closed for Labour Day. AI optimism remains the base case unless geopolitics deteriorate.
After the close, Apple reported better-than-expected earnings, with services revenue nearing $31bn. The company authorised a $100bn buyback and raised its dividend by 4%. However, Apple remains absent from the AI model race and relies on external providers: they don’t have to spend on pricey infrastructure, but higher reliance to model providers means margin pressure and reduced control over its ecosystem over time, leaving Apple more exposed to pricing power and innovation cycles dictated by external AI providers than its own decisions.
In FX, the US dollar weakened, driven by a sharp drop in USDJPY after Japanese authorities signalled possible intervention beyond 160. This pattern is now well established: authorities warn near 160 and may step in. Intervention doesn’t reverse the trend but clears speculative positioning. Buying the yen remains unconvincing, but selling USDJPY into 160 – if timed well – can be effective.
