By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Participants remained focus on rising geopolitical events yesterday, seeing havens gain, as crude priced a greater risk premium. A busy data docket now awaits to conclude the week.
WHERE WE STAND – The spectre of possible US military intervention in Iran continued to loom large over markets yesterday, as participants continued to price a greater geopolitical risk premium across the board.
While such military action has yet to commence, the US continue to amass forces in the region, while numerous sources stories indicate that President Trump has been briefed on various military options, with there being some potential for a strike as soon as this weekend, even if a final decision is yet to be made.
The market reaction to this clear ratcheting higher in tensions has been not only obvious, but also relatively predictable. Crude benchmarks have rallied to YTD highs as a greater geopolitical risk premium is priced, while both gold and the dollar attracted some notable haven inflows, with said inflows taking the greenback to its best levels in a fortnight against a basket of peers, as stocks faced a few headwinds. What is probably playing most on the market’s mind here is that, unlike the surgical Iran strikes last year, or the capture of Venezuelan President Maduro in January, US military action in Iran now would probably be aimed at regime change, thus raising the prospect of a prolonged, drawn-out campaign.
Still, while I’d certainly not want to be short either crude or gold into the weekend, it’s worth bearing in mind that geopolitical events tend not to have a lasting impact on markets, with the ‘half-life’ of these sort of things typically very short indeed. Hence, especially in a crude market spare capacity remains pretty ample, I struggle to see prolonged gains stemming from any flare-up in tensions; barring, of course, an issue in the Strait of Hormuz, which can’t ever be definitively ruled out.
As for other matters, while the dollar did gain ground pretty broadly, the pound notably underperformed, with the quid not helped by dovish comments from external BoE MPC member Mann, who flagged concern over the recent rise in unemployment, and referenced the January inflation data as being ‘good numbers’.
For someone who’s been the MPC’s most hawkish outlier of late, this represents a significant dovish pivot, and in turn not only cements the case for a March rate cut, but also for Bank Rate to be cut down to a neutral level, around 3%, by the end of summer. It seems that it is now only a matter of time until other hawks on the MPC, such as Chief Economist Pill, also ‘wake up and smell the coffee’.
LOOK AHEAD – Quite a lot on the docket to get through today, as the week draws to a close.
‘Flash’ PMIs are due from pretty much every major economy, with the surveys set to point to a marginally faster pace of expansion in the eurozone, and a marginally slower one here in the UK, compared to that seen in January. On the subject of activity stats, we also receive fourth quarter US GDP this lunchtime, with the economy set to have grown by 3.0% on an annualised QoQ basis, largely as a result of last year’s record-long government shutdown taking a chunk out of the data.
Elsewhere, we receive January’s UK retail sales and public borrowing stats this morning. The latter will almost certainly show a monthly budget surplus, though this is simply due to January seeing higher tax receipts than other months due to the self-assessment tax deadline, and not some sort of sudden and miraculous commitment to fiscal discipline from those in Downing Street.
Beyond data, the US Supreme Court are due to issue opinions today, with participants continuing to wait for a ruling in the IEEPA tariffs case. As usual, SCOTUS don’t inform us in advance which cases will be ruled on at any given time, while even if the IEEPA tariffs are struck down, the Trump Admin have numerous other parts of commerce law that can be used to enact similar levies, likely resulting in there being little difference to the overall average tariff rate, in the medium-term, regardless of how SCOTUS rules.
Other than that, one must bear in mind the potential for gapping risk over the weekend as tensions in the Middle East continue, and the potential for US military intervention in Iran continues to grow.
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