President Trump announces a naval blockade of all traffic to and from Iranian ports following the failure of talks with Iran, which has hit risk sentiment.
- As has been usual lately, markets are dominated by the latest developments in the war in the Middle East. Following the failure of talks in Pakistan over the weekend between the USA and Iran, President Trump has announced a naval blockade of Iran at the Strait of Hormuz (note that Iran also has a northern coast, but it is not useful for oil exports), stating that this will begin today at 10am New York time. The idea is to stop all naval traffic to and from Iranian ports. If sustained, this will collapse the Iranian economy and virtually destroy public revenue. Markets reacted by opening in Asia with the S&P 500 Index gapping lower and also a flow into risk-off assets such as the Japanese Yen and out of assets like the Aussie and the Kiwi as well as the precious metals Gold and Silver. Notably, Crude Oil prices also spiked. However, as the Asian session approaches its end as at the time of writing, these moves are all reversing strongly, and risk-off has given up most of its gains.
- The asset that has given up the least of its earlier gains is Crude Oil. Notably, although both are now selling off a bit, both Brent and WTI are trading above $100 per barrel.
- Despite the existing ceasefire only have just over one week left to run, prediction markets still see that it is more likely than not to hold. These markets also see an end to the war in June but without an official peace deal. This suggests that risky assets will hold up even if they get shaken from time to time, but I believe these expectations underestimate the resolve of President Trump to fight for his demands for a total end to uranium enrichment in Iran, so I can see a surprise to the downside (risk on) as potentially happening. There are reports in the media President Trump is contemplating limited military strikes on Iran, which would formally collapse the ceasefire. A confrontation at the Strait of Hormuz between the navies would probably also achieve the same.
- In the Forex market, the US Dollar has been the strongest major currency since today's Tokyo open, while the British Pound has been the weakest, although the amounts are relatively small so likely insignificant. The USD/JPY currency pair is again advancing towards ¥160 . Trend traders will still be long of USD/JPY on the bullish breakout which we saw two weeks ago, although this very slow-moving trade is looking less and less attractive.
- The Japanese 10-Year Yield earlier advanced to reach a fresh 29-year high. This is a potentially bullish sign for the Yen, but its role as a safe haven is overshadowing these fundamental factors affecting its status as a national currency.
- Bitcoin was a notable exception to the risk off / risk on moves we have seen since this week opened, suggesting the cryptocurrency is really on the sidelines of today's market.
- There are no high-impact data releases scheduled for today, so rumours about the war will probably be a major market driver today.