Markets Eye Further US-Iran Talks

MACRO FRAME

Markets move into earnings season with a fresh batch of earnings that have surprised to the upside for the most part. US equity indexes are treating Iran’s non-action as a bullish catalyst. Markets will also continue to watch for signs of renewed diplomatic efforts between the US and Iran.

STOCK INDEX FUTURES

US equity index futures are little moved overnight as the Iran relief rally slows down. In a Fox News interview, Trump said the conflict is “nearly concluded” and suggested a new round of direct negotiations could take place in Pakistan within the next two days. CENTCOM confirmed a full economic blockade of Iranian ports is in effect, no cargo entering or exiting by sea, while mine-clearing operations continue in the Strait. Oil fell on Tuesday as Trump’s comments fueled a slight unwind. Brent settled around $95 and have moved little since.

US equity markets shrugged off the weekend’s bad news after Bloomberg reported that Washington and Tehran are close to agreeing to another round of in-person negotiations before the ceasefire expires. No date or location has been confirmed, but sources say the objective is to extend the ceasefire. The S&P and Nasdaq have fully recovered all losses since the conflict broke out, suggesting fresh momentum for the indexes.

Investor behavior reflects the three-year bull market conditioning of buying the dip rather than pricing genuine geopolitical tail risk. The primary downside watch-point remains a lagged supply shock feeding through into Q2/Q3 earnings and CPI data, as pre-war inventory buffers wear off. The economic damage has likely not have appeared in the hard data yet. Polymarket odds of Hormuz normalizing by April 30 now at just 19% as of April 12. That said, Iran’s non-action is the daily bullish catalyst for the indexes under current conditions, while a confirmed Iranian strike on Gulf infrastructure would be the circuit-breaker event that ends the current levitation.

On the corporate front, Bank of America, Morgan Stanley, and ASML report earnings today, with the two banks already having reported. Bank of America rose about 1% in premarket trading after posting higher Q1 profits. Morgan Stanley traded near the flatline ahead of its earnings release. ASML is the first major semiconductor equipment read for the quarter, bookings trajectory will set the tone for the SOX index into next week’s TSMC report on Thursday.

Watch point: Renewed optimism spurring from belief that the US and Iran will hold more talks has provided markets with fresh momentum despite the geopolitical risk, leaving markets open to headline trading and heightened volatility.

CURRENCY FUTURES

US DOLLAR: The USD index is 0.11% higher at 98.23, following a slight rise in oil prices overnight. The main catalyst for USD remains the direction of oil prices and developments between the US and Iran. As evidenced by previous moves, any signs of de-escalation and diplomatic off-ramps will renew pressure on the dollar, while any escalation points towards more safe haven demand.

Underlying fundamentals make the case for a resumption of the dollar’s downward trend once hostilities in the Middle East are officially over. Despite rising inflationary pressures driven by energy prices, the dollar has lost its interest rate differential support it once drew from hawkish Fed expectations, support that has since been repriced away. With the labor market softening materially, the underlying case for a Fed rate cut later in the year remains intact.

Watch point: Despite March’s hot inflation print and a sticky February PCE reading, a move up from the Fed is out of the picture as the Fed is well positioned in its policy rate for the time being, though a weak labor market leaves the door open for easing.

EURO: The euro is little changed at $1.1783. Developments regarding the ceasefire between the US and Iran remain the dominant factor in price direction for the euro. European Central Bank President Christine Lagarde on Tuesday said the euro zone’s economy is somewhere between the ECB’s baseline and adverse scenarios, adding the central bank would be “agile” when setting interest rates. AThe risk of a prolonged rise in energy prices makes a more appeal case for a hike at the June meeting. Markets are fully priced for a rate hike at the June meeting and see one more rate hike by year end. The path to tightening from the ECB will hinge on the effectiveness of the two-week ceasefire and whether it brings lasting peace. The critical risk factor is the persistence of the energy shock.

Watch point: March’s inflation data confirmed that headline inflation was dragged higher by rising energy prices, while other components were reassuring to the broader inflationary picture. A rate hike at the ECB’s April meeting is unlikely, while the case for tightening depends on the effectiveness of the ceasefire and duration of the rise in energy prices.

BRITISH POUND: Sterling is 0.12% lower at $1.3546. Price direction in FX markets continues to be dominated by developments from the US-Iran conflict, mainly oil prices given Britain’s dependence on energy imports and the economy’s sensitivity to higher energy costs. Bank of England policymaker Megan Greene warned that second-round effects from oil prices may not be present in the economy for some time, raising the risk of a lagged-inflation spike from higher energy prices. Greene said the main risks to policy would be evidence that higher energy prices are feeding through to increased wages and prices of other goods and services. However, there is quite a bit of slack in the UK labor market and overall weaker consumer demand, suggesting that businesses may be less likely to pass on any increase in costs to consumers. Greene also noted that while she is prepared to raise rates, a move this month would be premature.

Markets continue to expect an upward move in BoE policy, with a rate hike by September fully priced in. However, expectations for year-end policy have fallen dramatically in recent days, markets are now pricing 37 bps of tightening, down from 51 bps on Monday and well below over 75 bps of tightening priced at the onset of the conflict. The weakness of the UK economy remains a limiting factor for potential tightening and market-implied odds appear to be overshooting realistic BoE policy.

Money markets had previously been pricing in two rate cuts this year before the outbreak in hostilities as economic growth remains stagnant, business activity growth is slow, while falling wage growth and a weak employment picture in the country remain favorable for policy easing by year-end rather than tightening. However, the case for policy easing out of the BoE remains subject to the effectiveness of the ceasefire and if oil prices can drop closer to pre-war levels, given that inflation in the UK remains among the highest in the G7. If those dynamics fail to materialize, the case for policy easing may be out of the picture.

Watch point: Signs of a diplomatic route between the US and Iran and friendly to the pound, though pre-war macroeconomic factors could resume their pressure on the currency if hostilities find a quick end.

JAPANESE YEN: The yen slipped 0.18% against the dollar to 159.06 yen per dollar, following broader moves in the currency market. The yen remains vulnerable to selling pressure on concerns that the nation’s trade balance will deteriorate and the rising risk that crude oil prices stay elevated. The yen is caught between a US-Japan rate differential (Fed at 3.50–3.75% vs. BoJ at 0.75%) that keeps carry flows structurally short JPY. The chance of a rate hike this month by the Bank of Japan, has receded as the war keeps markets volatile and muddies the economic outlook. Bank of Japan Governor Kazuo Ueda said on Monday that economic and price developments were moving roughly in line with the bank’s forecasts, but called for vigilance over the impact of the conflict in the Middle East. Swap markets now assign a 32% probability of a BoJ rate hike in April. The yen’s near-term trajectory remains hostage to geopolitical developments, a durable ceasefire could quickly unwind oil-driven inflation expectations and reduce urgency for BoJ action, though the bank is set to maintain its tightening bias.

Watch point: An April rate hike could pull USD/JPY closer to 155, though the odds of such happening appear unlikely at the time being.

AUSTRALIAN DOLLAR: The Aussie is 0.22% higher to $0.7140, holding near a one-month high as global equities have also risen on hopes of renewed peace talks between the US and Iran. Three-year Australian government bond yields fell 2 bps to 4.607% after a 7 bp drop on Tuesday, while the benchmark 10-year yield was also down 2 bps to 4.932%. Persistent attempts at a diplomatic off-ramp between the two warring countries would prove bullish for the AUD, given the Reserve Bank of Australia’s tightening bias and positive underlying growth conditions in the country. The main risk though would be a notable cooling in domestic growth and the labor market, upending yield support for the currency.

Rising inflationary pressures and expectations of tightening from the RBA offer underlying support for the currency. Markets imply a 68% chance of another quarter-point rise in May, and see rates at 4.63% by year-end, a drop from earlier expectations of 4.70%. While a durable ceasefire would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to keep the RBA on a tightening path. Australia will publish its monthly jobs data for March on Thursday where any labor market disruptions from the ongoing Middle East conflict will be closely monitored.

Watch point: The RBA is likely to maintain its tightening bias amid persistent inflationary pressures.

TREASURY FUTURES

Yields are little changed across the curve with no fresh catalysts overnight. The bond market could be dealing with headline fatigue, treating the lack of attacks on infrastructure as a reason to not move much, likely pricing in current geopolitical risk, though renewed hostilities would likely see yields move higher. Longer-run inflation expectations at the time-being offer resistance to higher yields as the Fed should remain biased towards policy-easing given weakness in the labor market. The 1/2-year inflation swap spread rose to 36.22 bps, in line with expectations that markets are expecting the impact of higher energy prices to be short-lived.

However, the rise in energy prices does complicate the case for policy-easing if a durable ceasefire and end to hostilities cannot be agreed to. That said, the NY Fed’s March 2026 Survey of Consumer Expectations showed 3-year inflation expectations rising only a modest 0.1 ppt despite the largest monthly gasoline spike on record. Longer-run inflation expectations remain central to Fed policy, meaning that anchored expectations will support the case for policy easing later in the year. With 2-year swaps near 2.75% and no evidence of sharp rises in longer-horizon measures, markets are not pricing a scenario that requires a policy response from the Fed. We maintain our outlook for one Fed rate cut in 2026.

Watch point: Following March’s labor and inflation data, an immediate case for a change in Fed policy remains unlikely, while a path to loosening remains open.

The spread between the two- and 10-year yields is 50.70 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.759%.

 

 

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