Geopolitical tensions dominated market headlines last week as the Trump Administration withdrew from the Iran nuclear deal along with no signs of the U.S. and China trade tensions abating. However, in a rapid turn of events on Sunday, the Trump administration commented that they are actively working with China on finding “a way (for ZTE, the Chinese telecommunications giant) to get back into business” with the US suppliers. U.S. equity futures are poised to open higher this morning on the back of the positive news. Inversely, rates are opening down 2-3 bps as of this writing.
I. U.S. Withdraws From Iran Accord
The Trump Administration’s decision to withdraw from the Iranian nuclear accord and re-impose sanctions on Iran had rippling effects. First, crude oil touched a 3.5-year high during the week. If the global expansion continues, rising demand could further fuel oil prices. Brent crude is currently trading at $77.37bbl, up over $10bbl from the start of the year.
While the full impact of the U.S. sanctions on the oil market is unclear, many Asian countries receive oil from Iran. China, Indian, and Korea are among the largest importers of oil from Iran. South Korea, in particular, will have to tread carefully given the current negotiations with North Korea. While there is a grace period, any country that continues to trade with Iran after the allotted windows will likely face US sanctions if they fail to reduce or end their trade.
Airplane makers, Boeing and Airbus, potentially have the biggest loss given their contracts with Iran are worth about $40 billion combined.
II. China/U.S. Trade Talks
While there has been positive dialogue over the weekend, the U.S. and China have a long road ahead. A Chinese delegation is meant to speak with U.S. officials this week in the efforts to come to a trade agreement, there have been reports that the talks may be delayed in part due to the public hearings. Further, the U.S. extended public hearings initially set for May 15th to the 16th and 17th to provide companies and industry groups an opportunity to share their perspective on the impact of the $50 billion planned tariffs.
III. BOE Leaves Key Rate Unchanged
The Bank of England left its key rate unchanged at 0.50% last week, on the back of recent weaker-than-expected economic data. Nearly a month ago, the market was expecting a rate hike at the May meeting, but industrial output barely increasing coupled with Brexit concerns weighed on the economy. The market is currently expecting a rate hike at the central bank’s meeting scheduled in August.
IV. Italian Politics
The Italian political parties, the 5 Star Movement and anti-immigration League party are likely to form a coalition government in the coming days. The parties have promised to reduce and simplify taxes and boost spending on pensions and other social benefits. Market reactions were initially muted but volatility is beginning to pick up. The EUR/USD cross is now trading at 1.198, down from the 2018 year-to-date high of 1.25.
V. U.S. April Inflation Soft
Inflation was softer-than-expected in April, with core inflation only rising by 0.1%. Some market practitioners considered the data as a sign that the Fed will not raise rates as quickly as anticipated. The stock market rallied on the back of the news, while Treasury yields remained muted. The S&P 500 rallied over the week ending at 2,727.72, a 2.4% gain. Ten-year Treasuries were at 2.979% at the time of this writing.
On the docket for this week:
Key U.S. data includes: retails sales (Tuesday), housing starts (Wednesday), building permits, industrial production, capacity utilization, weekly jobless claims (Thursday), Philadelphia Fed manufacturing survey, EIA natural gas storage change.
Fed officials scheduled to speak include: Loretta Mester (Monday), James Bullard, John Williams (Tuesday), Bullard (Wednesday), Neel Kaskari (Thursday), Mester (Friday).
Overseas data includes: AUD central bank minutes (Tuesday), CNY retail sales, CNY industrial production, German GDP, French CPI, Swiss producer and import prices, GBP unemployment, Eurozone GDP, GBP inflation report hearings, AUD wage price index (Wednesday), German harmonized index of consumer prices, Eurozone CPI, NZD PPI, JPY machinery orders, AUD consumer inflation expectation (Thursday), AUD unemployment, CAD BoC review, JPY CPI ex food and energy, German PPI (Friday), EUR current account, CAD retail sales, CAD BoC CPI.
