Markets still pricing on hope of a US-Iran deal

Good morning

A stronger than expected US ADP employment number yesterday gave some hope to those looking for a nonfarm payroll headline over the +60k expected on Friday.  Fair to say the US dollar was hardly impacted, driven as it was by Middle East talk and large-scale selling against the Yen.  Still, we’ve not seen anything really resembling USDJPY intervention for 24 hours or so with USDJPY sitting in a range broadly between 156.00 and 156.50, we are currently almost bang in the middle of that range.  While we may not have seen actual intervention, Japan officials have reminded us that further action is possible.  Japanese markets reopened after Golden Week, the Nikkei was up over 5.5% as it played catch up with remarkably bullish global equity markets.

GBPUSD and EURUSD are 1.3600 and 1.1745 respectively, down from yesterday’s highs of 1.3640 and 1.1795.  Those levels were reached over optimism for a peace deal in Iran which also send oil prices sharply lower, although that optimism didn’t last for long.  Trump is still assuring us the war will be completely over soon.  His attempts to win control of the Strait of Hormuz by safely escorting ships didn’t last very long, whether that is due to concerns over possible Iranian strikes on US warships, cargo ships or UAE ports remains to be seen. 

He puts the withdrawal down to progress in Iran talks but there is a feeling he may have backed down.  He has continued his threats to Iran to make a deal or ‘be bombed to hell’.  Press reports suggest Trump could be worried that higher fuel prices could damage his chances in the November midterm elections.  The energy companies aren’t complaining mind you, Shell has reported profits of over £5bn for the first quarter, up some 25% from the same period last year.

Still, it is a reminder than as and when a peace deal is struck, we are likely to see both oil and USD fall sharply.  Regular readers may remember me mentioning a GBPUSD 1.3400 call expiring at the end of May that at the time cost 100 pips, on the idea that he US dollar would weaken if a peace deal was struck.  With spot around 1.3600, we have 200 points of intrinsic built in which leaves the option valued well above our entry point.  It could be prudent to sell out half, recouping the premium paid and leaving the remainder to run to expiry completely risk-free.  Those who looked at the same option with a 1.3950 knock out have the luxury of only have paid half the premium but at the expense of not really being able to trade out until expiry.

In sport, Arsenal will face PSG in the Champions League final after the French side managed a 1-1 draw against Bayern Munich yesterday evening, PSG scoring a very early goal that put them 6-4 up on aggregate which left Bayern with a massive task.  Bayern fans will be a bit miffed at some of the refereeing decisions that didn’t go their way, we’re getting more used to hearing that than ever.  This evening Villa will try to overturn a one goal deficit against Notts Forest in the Europa League semi-final this evening, while Crystal Palace will hope to hold onto their two goal advantage in the conference league against Shakhtar Donetsk.  Arsenal have made it to the final, wither Forest or Villa will make their final, Crystal Palace could be the third English team in three European trophy finals.

Local elections take place across the UK today and I’m encouraging my kids to exercise their right to vote although I fear, like many, they are fairly ambivalent as to who is in charge.  My main concern, without giving away my voting stance, is that the young people who favour parties such as the Greens are more likely to vote which, for me at least, is a worry.  In my area we have Greens, Reform, Labour, Conservative and the LibDems, who have been in control for the last few years,

Initial jobless claims is possibly the main event today economic data-wise, we’ll hear from several central bank officials as well but I’m not sure we’ll get anything out of the ordinary from them.   Tomorrow nonfarms is of course the big one, but even that could be overshadowed by events in the Middle East. 

Have a great day…

-  10.00 EU retail sales

-  12.30 US challenger job cuts

-  13.00 ECBs Elderson speaks

-  13.30 US initial jobless claims

-  13.40 ECBs Lane speaks

-  18.00 Feds Kashkari speaks

-  18.00 ECBs Schnabel speaks

-  19.05 Feds Hammack speaks

-  20.30 Feds Williams speaks