Mirage or Momentum? Markets Cling to Peace Deal Hopes
Despite the US and Iran continuing to exchange military strikes, with Washington responding forcefully after Iran allegedly shot down a US helicopter, risk assets have avoided a steeper sell-off. President Trump has been dangling the carrot of a potential near-term reopening of the Strait of Hormuz, which is helping to keep sentiment from completely souring. We are yet to see whether hopes of a US-Iran peace deal are merely a mirage of water in the desert or if they will actually come to fruition. For now, markets are positioning for the latter, choosing to focus on the possibility of diplomacy rather than the reality of ongoing hostilities.
Oil has had a typically volatile week. It surged as much as 5% on Monday amid renewed hostilities, only to give back around 3% in the last trading session on hopes that the Strait of Hormuz could reopen. The US Energy Secretary added to the optimistic tone by suggesting that traffic through the waterway was increasing, although no specific numbers were provided. Oil remains headline-driven and highly reactive - positioned to pivot sharply higher on any escalation or lower on signs of de-escalation, depending on the prevailing narrative of the day regarding the US-Iran conflict.
In FX markets, positivity around a potential deal has dragged the Dollar Index (DXY) back below the 100 level. However, any hot read on US inflation data this week could quickly see the DXY reclaim triple-digit territory. The Euro has found some support from expectations that the ECB will hike rates this week in response to rising energy-driven inflation. Elsewhere, the yen is receiving no such lift, with the USDJPY rate still hovering at or around the closely watched 160 level, a threshold that has previously triggered intervention from Japanese monetary authorities.
Gold has been one of the clearest underperformers amid the shifting interest rate dynamics. The precious metal’s safe-haven status has been notably absent, with the combination of high bond yields and a robust US Dollar pushing spot gold to the bottom of its recent trading range and its lowest level since March. Gold likely needs a meaningful let-up in Treasury yields or a softer Dollar to push back toward $4,500, and that may ultimately come down to cooling inflation expectations in the US. Having slipped below $4200, the first hurdle for gold to climb will be to try and move back above former support but now-turned resistance at $4350.
Looking ahead, the focal point of the economic calendar this week is today’s US CPI release. The print is expected to rise from 3.8% to around 4.2%, reflecting the impact of higher energy costs. Coming off last week’s very strong NFP jobs data, the further above 4% the inflation figure comes in, the greater the risk that the Fed’s timeline for any potential rate increase could be brought forward. Risk assets would much prefer a benign reading that helps calm investors’ interest rate nerves.
Adding to the market’s focus this week is SpaceX’s highly anticipated IPO on Friday, which is expected to be one of the largest tech listings in years. This comes amid a broader flurry of high-profile tech IPOs, with Anthropic and OpenAI also planning listings in the coming months. The key question is whether this wave of new offerings can generate enough fresh enthusiasm and momentum to help shield the US equity market from ongoing geopolitical uncertainty and elevated oil prices
In summary, risk assets have displayed resilience by clinging to hopes of diplomatic progress despite ongoing military actions. Yet with volatile oil and persistent inflation concerns, the bullish narrative is showing signs of strain - especially as the tech sector, long the bedrock of the market, faces increasing scrutiny over lofty valuations.
.jpg)
.jpg)
