Markets
Iran Foreign Minister Araghchi likened the US’s “Project Freedom” in the Persian Gulf to “Project Deadlock”. Since US President Trump announced plans to help commercial vessels through Hormuz, the number of reported military incidents went up reaching amongst the largest levels since the start of the cease-fire about a month ago. Brent crude went from opening levels near $106.5/b to currently $113. When asked about how long the situation would still last, President Trump returned to his answer of choice since the very beginning of the war: “two weeks, maybe three”. Yesterday’s events clearly raised the probability that the fragile cease-fire might snap. Defense Secretary Hegseth and Joint Chiefs of Staff Chairman Caine will hold a news conference later today.
Yesterday’s trading was skinned by public holidays in Japan, China and the UK. Markets nevertheless marched to the drums of the higher oil price. Risk sentiment took a hit with key European indices losing up to 2% for the EuroStoxx50. Main US benchmarks lost between -0.2% (Nasdaq) and -1.15% (Dow). Core bond yield curves extended the bear flattening process. EU swap rates added between 8.8 bps (2-yr) and 3.6 bps (30-yr). The EU 2y swap rate managed its highest closing level (2.94%) since July 2024 as money markets add to ECB tightening bets this year. With a 25 bps June rate hike almost fully discounted, that means adding to cumulative tightening bets for this year. Currently markets are swinging back a total of 3-4 moves. An avalanche of ECB speakers hit the wire with Governing Council member Kazimir bluntly saying that policy tightening in June is “all but inevitable”. ECB vice president de Guindos suggested that the war shock affected inflation more than growth with Bundesbank Nagel adding that a rate hike would come without marked improvement in price outlook. Recall that ECB President Lagarde suggested last week that “we’re certainly moving away” from the base scenario. ECB Simkus said it’s clear we’re talking about a possible hike in June. Other ECB members were less committed for now. US Treasuries yesterday followed the bear flattening with yields ending the day 7.5 bps (2-yr) to 5.6 bps (30-yr) higher. The former extends the trend that started after last week’s hawkish hold by the Fed. US money markets are back to erring on the side of a rate hike instead of a rate cut on a 12-month horizon. The US 30-yr yield closed at 5.02%, the highest the summer of 2025 as US risk premia start building again. Fitch over the weekend warned for US deficits just shy of 8% of GDP for this year and next. On FX markets, the dollar profited from the set-up with EUR/USD returning below 1.17. Today’s eco calendar contains US services ISM and JOLTS job openings but we don’t expect them to break the market reaction function to developments in the Middle East (higher oil, bear flattening, stronger USD, weak risk sentiment).
News & Views
The Reserve Bank of Australia this morning raised the policy rate by 25 bps to 4.35%. It was the third consecutive hike and was supported by a 8-1 majority (one vote for unchanged). The decision comes as inflation had already picked up materially in H2 2025 with information since the start of the year still reflecting capacity pressures. Higher fuel and commodity prices from the conflict in the Middle East now add to inflationary pressures as many firms are experiencing cost pressures and are looking to increase prices of goods and services. Even in a baseline scenario assuming that the conflict is resolved soon and fuel prices decline, the RBA sees inflation peaking higher than expected in February (4.8% end H1). Trimmed mean inflation is expected to peak at 3.8% with both measures expected to return to 2.5% by June 2028. The RBA still sees risks to inflation tilted to the upside. After three consecutive hikes, it is now well placed to respond to developments and the Board is focused on its mandate to deliver price stability and full employment. Money markets now discount one additional rate hike by end summer/autumn. The reaction to the decision is mild. The 3-y government bond yield eases 2.3 bps (to 4.64%). After filling offers north of AUD/USD 0.72 over the previous days, the Aussie dollar this morning eases slightly (0.715).
The US Treasury raised its estimate for borrowing in the current April-June quarter to $189bn. The amount is $79bn higher than in the estimate of February. The upward revision was mainly due to lower projected net cashflows, but this was partially mitigated by a higher cash balance at the start of the quarter. For the July–September 2026 quarter, Treasury expects to borrow $671bn in privately-held net marketable debt, assuming an end-of-September cash balance of $950bn. During the January–March 2026 quarter, Treasury borrowed $577bnin privately-held marketable debt and ended the quarter with a cash balance of $893bn compared with estimates of $574bn borrowing and an assumed an end-of-March cash balance of $850bn in the February projection. Additional details on the refinancing will be released tomorrow.
