A whiff of optimism pervaded markets as investors remained hopeful over a US-Iran deal despite US strikes on Iranian vessels in the Strait of Hormuz.
European markets flashed green on Tuesday while US equity futures extended gains amid the improving mood. Nevertheless, sentiment remains shaky and with the ceasefire still fragile any signs of escalating tensions may flip the risk pendulum back toward risk-off.
Beyond geopolitics, global equity markets may be heavily influenced by inflation data across Europe and the Fed’s preferred inflation gauge.
It’s a big week for the United States, marked by a series of economic reports, including the latest PCE report.
The April US personal income and spending report including the PCE index — the Fed’s preferred inflation gauge - will offer key insight into the direction of price pressures.
Markets are forecasting PCE deflator YoY to jump 3.8% in April with the core figure rising to 3.3% from 3.2%.
Ultimately, any signs of rising price pressure may reinforce bets around higher US interest rates. Money markets are currently pricing a 77% chance of a 25-basis-point hike by December.
Looking at commodities, oil benchmarks rebounded as fresh US military strikes on Iran dampened hopes for a deal to re-open the Strait of Hormuz.
Brent rebounded closer toward triple digits after tumbling more than 7% in the previous session. Any signs of progress towards a potential deal may drag oil prices lower, while escalating tensions could propel oil benchmarks comfortably back into triple-digit territory. Brent has gained almost 65% year-to-date, while Crude is not far behind up just over 60%.
Gold shed over 1% as US strikes in the Strait of Hormuz fanned inflation fears and boosted the dollar.
It is becoming increasingly clear that gold remains heavily influenced by inflation fears and the dollar’s valuation with risk appetite becoming secondary. Essentially, any progress in the US-Iran talks that cools inflation fears may support gold prices. However, if tensions intensify with the Strait of Hormuz closed, this may drag gold lower amid rising Fed hike bets and an appreciating dollar.