Hopes for a diplomatic breakthrough to de-escalate the conflict pushed oil prices lower and lifted equities, while SpaceX’s strong debut added to Wall Street optimism. The record-breaking IPO rose 19% on its first trading day, helping support a 0.5% gain in the S&P 500 and broader strength across global equity markets. President Trump had said a deal with Iran could be finalised imminently though this looks increasingly unlikely following Isreal’s weekend strike on Beirut. Lower oil prices have eased inflation concerns and the market pushed expectations for the next Fed rate hike into next year. Currency markets were stable, while treasuries were little changed.
The proposed US-Iran memorandum of understanding would reportedly immediately reopen the Strait of Hormuz without tolls and provide Iran with sanctions relief conditional on compliance. It would extend the ceasefire for 60 days, including in Lebanon, while nuclear negotiations continue, and establish a framework for addressing Iran’s enriched uranium stockpile. The treatment of billions of dollars in frozen Iranian assets remains unresolved.
Oil prices extended lower on Friday, with front-month Brent futures ending last week near $87 a barrel, the lowest level since mid-April. There were large intraday swings: prices initially fell, rebounded after President Trump accused Iran of misrepresenting the terms of the proposed deal, and then turned lower again amid signs that energy flows through the Strait of Hormuz were beginning to increase.
US consumer sentiment improved in early June for the first time in four months, helped by lower gasoline prices. The University of Michigan’s preliminary sentiment index rose to 48.9 from May’s record low of 44.8, though it remains historically weak. Inflation expectations also eased, with one-year expectations slipping to 4.6% from 4.8% and five-to-10-year expectations falling back to 3.4%.
US Treasury yields oscillated with oil prices amid conflicting narratives around the proposed US-Iran deal. The 10-year yield fell to a session low near 4.43% before rebounding to end little changed at 4.48%. Markets are pricing around 20bp of Fed tightening by December, with attention turning to the FOMC decision on Thursday morning NZT. European yields declined, partly catching up to the previous session’s Treasury market rally.
UK GDP fell 0.1% in April, the first monthly contraction in eight months, as weakness in services more than offset gains in construction and manufacturing. The data reinforce the case for the Bank of England to keep rates on hold at 3.75% this week, despite the inflationary impulse from higher energy prices linked to the Iran war. The policy trade-off remains challenging, with weaker demand arguing against a near-term rate rise even as inflation risks have increased. The market is pricing just 33bp of tightening down from close to 50bp earlier last week.
The US dollar erased earlier gains as oil prices fell. G10 currencies were near unchanged relative to the local close. NZD/USD was confined to a narrow range around 0.5825 and was stable on the key crosses. CFTC futures market positioning data revealed that investors bought US dollars in the week to Tuesday. This saw the aggregate US dollar long rise by US$11 billion and reach the highest level since early last year.
There was a solid rally in NZ fixed income during Friday’s local session as the market responded to developments in the Middle East and lower energy prices. The swap curve beyond one year shifted 8–9bp lower in a near-parallel move. Two-year rates fell to 3.40%, the lowest level in two months, while five-year rates broke below the 3.80% support level. Government bonds saw a similar rally, with 10-year NZGB yields closing 8bp lower at 4.47%
The services PMI for May is released today with its manufacturing counterpart dipping to 49.9 on Friday. Electronic card transactions are also releases for the same month. There are largely second-tier data releases on the international calendar.
Select chart tabs
Stuart Ritson is a senior Markets Strategist at BNZ Markets.
