Oil prices have pushed higher as the market awaits fresh developments in the Middle East, following the lack of peace talks between US and Iran this week and an extension of the ceasefire. US Treasuries and currency markets have traded tight ranges. The NZD is trading just over 0.59. US equities are ignoring the stand-off and are trading stronger.
Soon after we went to print yesterday, market conditions became whippy after Iran confirmed that it wouldn’t be attending peace talks in Pakistan, US VP Vance cancelled his trip to Pakistan, and President Trump announced an indefinite ceasefire, purportedly on the request by Pakistan to allow time for Iran to present a unified proposal. The naval blockade of the Strait of Hormuz remains in place by both sides.
Some 24 hours later, the stalemate continues with no side willing to back down. Iran won’t reopen the Strait of Hormuz or take part in peace talks until the US naval blockade ends. There have been reports of Iran attacking three ships in the Strait attempting a crossing and seizing two of them. Meanwhile, the US will maintain the blockade to put economic pressure on Iran to capitulate. If Iran can’t export its oil, storage facilities will eventually be at maximum capacity and Iran would have to begin the process of shutting in oil wells, which would cause permanent damage and reduce future output.
Officials report the US and Iran are continuing to exchange messages through third parties, but little progress has been achieved. Mediators are attempting to get US and Iran to arrange a meeting for the end of the week. Officials say that Trump will give Iran a few days to offer a peace plan, so the ceasefire is not, in fact, indefinite.
Brent crude has pushed higher overnight and is trading with a USD102 handle. US 10-year Treasuries have range traded overnight in a tight 4.26-4.30% trading range showing little net change from this time yesterday and from the NZ close.
US equities are ignoring the doomsday scenario of a prolonged disruption of oil supply, with investors seemingly prepared to trade on the hope of a speedy resolution to the conflict. There is also some underlying support from a strong earnings season. The S&P500 is currently up 0.9%, recovering its loss over the past two days and nearing its record high set late last week. Technology stocks have outperformed and the Nasdaq index is up 1.4% to a fresh record high. European equity markets showed modest falls.
Currency markets show small net movement for the day and overnight. The NZD has been trading sideways just over the 0.59 mark with some evident resistance between 0.5920-0.5930 over the past week. The AUD has been hovering around 0.7160 and NZD/AUD is flat around 0.8250. The euro has been of the soft side of the ledger, seeing NZD/EUR make further modest gains, tracking towards 0.5050.
In economic news, UK annual CPI inflation jumped from 3.0% to 3.3% as expected, with mixed messages on the other key figures, including the core CPI slipping slightly to 3.1% and the services CPI lifting to 4.5%. Market reaction was muted, with the BoE seen to be in a wait and see mode before changing policy and global forces dominating price action in the GBP and rates.
In the domestic rates market, global forces dominated, with NZ rates playing catchup to the previous night’s offshore move. NZGB yields rose 4-6bps across the curve. The 2-year swap rate rose 4bps to 3.47% and the 10-year swap rate rose 5bps to 4.29%.
On the economic calendar, European and US PMI data are released tonight.
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Jason Wong is the senior Markets Strategist at BNZ Markets.
