Ceasefire Extension Calms Markets

MACRO FRAME

President Trump’s ceasefire extension pivoted sentiment, but the continuation of the blockade – both from Iran and the US, as well as a lack of a timetable for future talks offers uncertainty that is likely to cap gains.

STOCK INDEX FUTURES

US equity index futures moved higher following President Trump’s announcement that he would extend the ceasefire with Iran, though uncertainty persists around formal negotiations between the two countries. Trump explicitly directed the military to “continue the blockade, and in all other respects, remain ready and able”; Vance delayed his Pakistan trip and Iran had not confirmed attendance as of Tuesday evening. Meanwhile, the UKMTO reported that an IRGC guard vessel opened fire on a container ship without warning.

The June S&P is trading at 7,137.00, up 0.52% from Tuesday’s settlement of 7,100.00, within an overnight range of 7,121.25 to 7,147.50. Near-term support is seen at 7,121.25 (overnight low), then the 7,100.00 prior settlement, with initial resistance at 7,147.50 (overnight high) and the 52-week high of 7,185.75. SPX cash remains above its 50-day moving average of 6,772.80 and above the 200-day at 6,698.08.

The June Nasdaq is trading at 26,814.50, up 0.67% from Tuesday’s settlement of 26,634.75, within an overnight range of 26,727.75 to 26,864.50. Near-term support sits at 26,727.75 (overnight low) and then the 26,634.75 prior settlement, with initial resistance at 26,864.50 (overnight high), the 52-week high of 26,901.75, and the 27,000 round number. NDX cash remains comfortably above its 50-day moving average of 24,837.40 and above the 200-day at 24,666.73.

The June Dow is trading at 49,574, up 0.48% from Tuesday’s settlement of 49,339, within an overnight range of 49,492 to 49,648. Near-term support is seen at 49,492 (overnight low), then 49,339 (prior settlement) and the 49,000 round number, with initial resistance at 49,648 (overnight high) and the psychological 50,000 level. DJIA cash remains above its 50-day moving average of 47,913.05 and above the 200-day at 47,034.45.

The VIX is trading near 19.17, down about 0.33 points (–1.7%) from Tuesday’s close of roughly 19.50, reflecting easing hedging demand as futures rebound on reported U.S.–Iran ceasefire-extension headlines and Tesla earnings anticipation. The reading remains in the upper end of the moderate 15–20 band, suggesting the market has backed off yesterday’s tail-risk bid without slipping into outright complacency, which argues against a near-term risk-off posture at the open.

Watch point: Markets are awaiting confirmation of formal talks between the US and Iran as a precursor to continue the rally. Without such, gains in the equities are likely to face strong headwinds.

CURRENCY FUTURES

US DOLLAR: The USD index is little changed at 98.35. Small moves in the currency market overnight suggest traders are largely cautious about the extension of the ceasefire in Iran as uncertainty over formal negotiations remains. The geopolitical backdrop is likely to keep a tight grip on currency markets, consistent with the price action of recent weeks. Positive developments regarding US-Iran negotiations are likely to put the dollar on the backfoot, while a continuation of the status quo could see the dollar trade sideways until there is further clarity on formal talks between the two countries.

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: The dollar continues to find safe haven support and trade in line with oil prices. However, underlying macroeconomic fundamentals make the case for a resumption of the dollar’s downtrend when hostilities are over.

EURO: The euro is little changed at $1.1738. With no new data overnight, the euro is likely to continue trading against the dollar and oil prices, remaining headline driven. Positive developments out of the US-Iran conflict will be supportive of the currency, while safe-haven demand would see flows to the dollar. So far, the restrained moves in the FX market point to lingering optimism that a resolution between the two warring countries is still on the table.

Traders are still pricing in rate hikes by the year’s end but ECB President Christine Lagarde said the bank needs more information before drawing firm policy conclusions. The risk of a prolonged rise in energy prices makes a more appeal case for a hike at the June meeting.

Watch point: 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 little changed at $1.3509. March’s inflation rate rose to 3.3% from 3.0% in February. The jump in headline prices is reflective of the rise in energy prices, with the energy component being the primary driver of the reading. Core CPI eased to 3.1% from 3.2%, which is likely to reinforce the Bank of England’s position that it is too early to determine what the rise in headline inflation will mean for broader price pressures in the economy. Given the weak jobs market, which could make it harder for workers to demand higher pay or for businesses to pass on higher costs, policymakers at the BoE will likely want two-to-three months of data alongside further developments from Iran before making their decision. Markets are pricing a July rate hike.

Data out on Tuesday showed average weekly earnings, excluding bonuses, fell to 3.6% in annual terms over the three months to February from 3.8% in the three months to January, while the unemployment rate fell to 4.9% from 5.2%. Wage data is carefully watched by the Bank of England for a gauge on inflation pressures. Market-implied rate expectations were little changed in response to the data, reinforcing the view that the drop in unemployment overstated the health of the labor market.

Price direction remains heavily impacted by the geopolitical bid between the US and Iran, while domestic political pressures also present downside risks for the pound. Prime Minister Keir Starmer on Monday laid the blame on foreign ministry officials over the appointment of a US ambassador, saying they had kept him in the dark.

Watch point: Wednesday’s inflation data had little impact on the trajectory of Bank of England policy, as it is too early to read into inflation data. Meanwhile, slowing wage growth is expected to ease underlying inflationary pressures, leaving rate-hike timing expectations subject to the conflict in Iran.

JAPANESE YEN: The yen fell 0.10% to 159.21 yen per dollar. Data out overnight showed Japan’s exports rose for a seventh straight month, defying any major impact from the Gulf conflict so far. The Bank of Japan is likely to hold off raising interest rates next week, as prospects of a near-term end to the Middle East war keep the country’s economic and price outlook uncertain. Markets have scaled back timing of a rate hike by the BoJ to September. The BOJ is also expected to lift inflation forecasts while lowering growth projections, reflecting higher energy costs and broader headwinds linked to the Iran war.

The Yen has failed to hold a depreciation past the 160 level, as expectations of government intervention and eventual policy tightening offer support. However, a lack of policy-tightening at the bank’s meeting next week could see the yen routinely test the 160 level. 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: While an April rate hike is unlikely, confirmation of a near-term move upwards in policy could bring USD/JPY closer to 155, though geopolitical factors remain the main obstacle to appreciation against the dollar.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.7152. Market implied odds are placing a 75% chance that the Reserve Bank of Australia will deliver a third straight rate hike in May, with rates seen peaking at 4.6% by the end of the year. Analysts at Commonwealth Bank of Australia have tempered their bearish view on the currency, now forecasting it to fall to $0.69 by the end of June, instead of $0.67 previously. The Australian calendar is light this week, so the Aussie’s movements are likely to be dictated by headlines from the Middle East.

Labor data last week showed employment rose in March, while the jobless rate remained low, firming support for a May rate hike. 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.

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

TREASURY FUTURES

Yields are lower across the curve in pre-market trading, with the belly leading the rally. Current levels: 3M 3.684% (−0.2 bps), 2Y 3.756% (−2.3 bps), 5Y 3.880% (−2.8 bps), 10Y 4.263% (−2.8 bps), 30Y 4.879% (−1.9 bps). The 2/10 spread stands at 50.80 bps (essentially flat vs. 51 bps prior session), the 5/30 spread is at 100 bps (1 bp wider from 99 bps), and the 3M/10Y spread is at 58 bps (uninverted, 3 bps narrower from 61 bps).

TIPS markets show the 5-year breakeven at 2.60% (4/21, +3 bps d/d and +1 bp w/w), the 10-year breakeven at 2.38% (4/21, +3 bps d/d and +1 bp w/w), and the 5y5y forward rate at 2.16% (4/21, +3 bps d/d and +1 bp w/w). The spread between the 5-year and 10-year breakevens of +22 bps (5Y above 10Y) confirms that markets continue to treat the current inflation rise as front-loaded and largely transitory rather than broadening into longer-horizon expectations. With the 5y5y forward at 2.16%, well below the 2.5% de-anchoring threshold, the Fed retains full optionality to treat near-term CPI acceleration as transitory and maintain a dovish lean on the policy path. For the time-being, longer-run inflation expectations are offering resistance to higher yields as the Fed should remain biased towards policy-easing given weakness in the labor market. Additionally, the restrained moves in the bond market reflect lingering optimism that a deal between the US and Iran is still on the table.

Watch point: An immediate case for a change in Fed policy remains unlikely, while a path to loosening remains open. Well-anchored inflation expectations should offer resistance to higher yields, while supporting the case for Fed easing later in the year.

 

 

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