Sunset Market Commentary

Markets

Details of the announced interim deal between the US and Iran are still missing and only expected later this week. Based on previously floated versions, both parties will probably aim to restore Hormuz flows within 30 days of the extended ceasefire. The 60-day prolongation changes the narrative from “hoping for a deal” to “hoping that the deal doesn’t derail” as both parties try to tackle Iran’s nuclear ambitions. The lingering threat and the expectation of only a slow return of traffic through the key shipping artery probably help explain the lukewarm market response this morning, albeit after some frontrunning on Friday. Brent crude opened at $83/b from a $87/b close last Friday and still changes hands around that level. Core bond curves bull steepen, with German yields down 5 bps at the front end of the curve and US yields 4 bps lower. UK Gilts outperform (2-year: -6.5 bps). Again, the main move occurred after the European bell, highlighting very cautious investor optimism. EUR/USD spiked from 1.1570 to 1.1620 and remained there throughout European dealings. The EuroStoxx 50 is 1.2% higher, taking out the previous YTD and all-time high at 6200 in the process.

In the absence of key economic data, we look to ECB comments made since last week’s 25 bps rate hike. Overall, they continue to point toward further action, possibly as soon as July. ECB President Lagarde singled out underlying inflation as the key guidepost. June inflation numbers, due on July 1, could be crucial in determining the outcome of the July 23 policy meeting. She vows to kill inflation if it reawakens and considers it a personal duty to complete her mission. She is well aware that letting the inflation genie out of the bottle for a second time would be the biggest possible policy mistake right now. On a side note, she also endorsed more collective Eurozone financing as key to the Savings and Investment Union project. A mutualized debt instrument that brings depth and liquidity to the market is seen as critical for success. Slovak ECB member Kazimir said that the “direction of travel is clear” and favours frontloading the work that needs to be done. The damage in the Middle East cannot be undone overnight, even with a peace framework in place. Reopening Hormuz cannot be compared to simply turning a light switch back on. German Bundesbank President Nagel keeps all options open for the July meeting, as he expects oil supply normalization to take months. Other ECB members, including Rehn, Moulin, Pereira and Kocker, were less outspoken. They suggest further hikes in the coming months but want to see more data, especially regarding second-round inflation effects. The ECB’s wage tracker, due on Wednesday, is one to watch.

News & Views

US President Trump threatened to impose a 100% levy on French wine and champagne exports. In an interview with the New York Post, he criticized France’s 3% turnover tax on technology companies, which typically affects US-based firms the most. French lawmakers had voted in October to double the tax to 6%, but the measure was ultimately vetoed by ministers who feared disproportionate American retaliation. The US market accounts for around one-fifth of sales for the French wine industry. Annual trade is worth more than $2 billion.

The UK’s Rightmove real-estate platform said house prices fell 0.6% m/m in June and were 0.5% lower on an annual basis. It was the largest June decline in 14 years. Rightmove noted that house prices typically rise slightly in June and concluded that this year’s decline reflected many new sellers adjusting prices in response to the record number of homes available for this time of year. Rightmove reported that sales activity remained broadly steady, with buyer demand in May (the latest available data) down 10% y/y but largely consistent with trends seen so far this year. “Higher mortgage rates are continuing to affect activity, while the wider choice of homes for sale is encouraging buyers to take a less urgent approach unless a property really stands out on its price or presentation,” the platform said. Despite this, the number of sales agreed remains broadly in line with recent years and is even 5% above 2023 levels.