Risk-on as oil prices ease amid ongoing hostility

• Stocks jump as traders see Middle East conflict as localised
• Brent crude falls over 2% after making fresh highs close to $77
• G7 leaders struggle for unity as Trump says removing Russia from group was a mistake
• Dollar quiet, Antipodeans strong as risk sentiment improves

FX: USD printed an inside day as prices traded within Friday’s low to high range. The April long-term low is at 97.92. The dollar’s solid correlation with oil, as a net exporter, continued as Brent fell sharply through the day from ‘peak’ geopolitical risk and its intraday high at $76.98. It is noteworthy that even a historically clear-cut dollar positive event like an oil price shock mixed with geopolitical tensions failed to discourage the shorts. It looks like bearish consolidation before a fresh break to the downside. Of course, there are multiple risk events to contend with, including the FOMC meeting on Wednesday.

EUR was a mid-performer among the G10 as risk appetite returned. The ECB’s return to neutral has helped keep the single currency buoyant. Watch out for various ECB speakers again this week. The EU is reportedly prepared to accept a flat 10% tariff rate by the US under certain conditions. This is already priced in. Last week’s long-term top is 1.1631.

GBP was also mid-pack with resistance in cable around 1.3623/31. Wednesday sees the latest inflation data which is released the day before the BoE meeting. Recent weak data has seen markets price in more policy easing, with roughly close to two 25bps moves this year.

USD/JPY rose as the yen softened due to the safe haven currency trade reversing. That saw it and CHF underperform all its major peers. Focus is on the BoJ meeting and any guidance on policy normalisation together with domestic bond market volatility.

AUD outperformed with risk sentiment on the rebound. Resistance sits at 0.6549, the major Fib retrace level (61.8%) of the September to April decline. Labour market data will be watched on Thursday. CAD strengthened for a fifth straight day as the major hit a fresh cycle low. The loonie’s short-term correlations with crude oil are poor, contrary to popular opinion, at least currently.

US stocks: The S&P 500 added 0.95% to settle at 6,033. The Nasdaq closed up 1.42% at 21,938. The Dow Jones finished higher at 42,515, gaining 0.75%. The majority of sectors were green, although Energy, Health Care and Utilities were hit with energy stocks tracking crude prices lower. Crude initially gapped higher at the open as the Israel/Iran conflict escalated, although it then tumbled from the peaks while equities moved higher, paring some of the moves seen late last week. Attention will largely be on any de-escalation (ceasefire, resumption of nuclear talks), or escalation (strikes on energy facilities, targeting of leaders, US gets involved). The Philadelphia SE Semiconductor index (SOX) jumped over 3% as AMD surged over 8% on a broker upgrade.

Asian stocks: Futures are in the green. Asian markets were mixed as geopolitical concerns ramped up. The Nikkei 225 was boosted by the weaker JPY despite the escalation on the Israel-Iran front. In trade-related headlines, Japan’s top trade negotiator engaged in in-depth discussions with the US and explored the possibility of a trade agreement. The Hang Seng and Shanghai Comp were choppy with little reaction to the mixed activity data. Retail sales beat expectations while industrial output missed. Weekend reports suggested the US-China trade agreement in London didn’t resolve export restrictions linked to national security.

Gold printed a new high for the move at $3,452 in the early hours of the Asian session before falling back. The Iran de-escalation story saw more selling of the safe haven asset. Strong support sits at $3,272/86.

Day Ahead – Bank of Japan meeting, US Retail Sales

The BoJ is expected to keep its policy rate steady at 0.5%. Focus will be on any guidance from Governor Ueda regarding the future policy path. Money markets possibly continue to underestimate the risks of a rate hike as early as July or September, which are 10% and 25% priced in at the moment. We will also keenly watch to see if the bank alters its purchase pace of Japanese Government Bonds, with speculation this could be reduced. The current quarterly tapering pace of reducing monthly purchases is Y400b lasting until at least March 2026.

Consensus forecast US retail sales to remain at 0.1% though auto sales may drag as they were sharply lower in May, down 5%. The ex-autos measure is expected to contract by 0.3%, down from the prior 0.1%.  There have been mixed signals from various activity gauges, with credit cards showing gains while income measures look solid. Sales figures could show how tariffs may be affecting consumer spending patterns a key driver of the US economy.

Chart of the Day – Oil spikes higher and falls back

Brent crude prices whipsawed on news around the Israel-Iran conflict. Friday saw oil prices surge more than they have in three years as the adversaries kicked off. Iran, the third biggest OPEC producer (despite US sanctions), pumps around 3.3 million barrels a day of crude oil and exports roughly 1.7 million barrels a day. The loss of this export supply would wipe out the surplus that was expected in the fourth quarter of this year. But a media report yesterday said that Iran was to press Israel to agree to a ceasefire saw prices rapidly retrace their gains. The 200-day SMA sits at $71.61 with a major Fib level (38.2%) of the April 2024 – April 2025 a $71.01. Below here is support around the March 2025 and September 2024 lows at $68.50.

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