Oil Drives Markets Lower

MACRO FRAME

Markets head remain focused on peace talks between the US and Iran after a rise in tensions this weekend. Meanwhile, earnings season continues, opening the door for further volatility.

STOCK INDEX FUTURES

US equity index futures fell lower overnight in response to this weekend’s developments in Iran. Iran’s foreign minister declared Hormuz “completely open” on Friday, crashing WTI to $82.59 (-10%+); by Saturday Iran reinstated the closure after President Trump refused to lift the US blockade; on Sunday the ship seizure cemented the re-closure, oil has now round-tripped from $82 back to $90+. The two-week Pakistan-mediated ceasefire expires tomorrow (Apr 21/22) with no deal, Iran’s FM spokesperson said “no intentions of engaging” after the ship seizure. Tomorrow’s deadline marks a consequential event for markets, with no deal leaving likely resulting in the resumption of hostilities, while the creation of a framework could extend the rally.

Through Friday, 10% of the S&P 500 has reported Q1 results, and the early read is notably strong: 88% have beaten EPS estimates (vs. the 5-year average of 78%) and 84% have topped revenue forecasts (vs. the 5-year average of 70%), with earnings surprises averaging 10.8% above consensus, well above the 7.3% 5-year norm. The blended earnings growth rate has ticked up to 13.2% YoY, on track for the sixth consecutive quarter of double-digit growth, and FactSet’s projection, based on historical beat patterns, suggests actual growth could land near 19% by the time all reports are in, which would be the strongest since Q4 2021 (FactSet). Revenue growth is running at 9.9% YoY, poised to be the highest top-line growth since Q3 2022, with all eleven sectors reporting positive revenue growth. This week, 93 S&P 500 companies will report.

Watch point: Round two of peace talks serve as the most important event for markets in 2026, with massive up and downside risks on the table for markets.

CURRENCY FUTURES

US DOLLAR: The USD index is 0.10% higher at 98.19, as oil prices rose and investors flocked to the dollar in response to this weekend’s heightened tensions between the US and Iran. The weekend escalation revives the geopolitical risk premium just as markets had started pricing in a wind-down to the conflict. Still, the second round of talks between the warring countries leaves risks to price action skewed in both directions.

The main catalyst for USD remains the geopolitical bid and direction of oil prices. 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: 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 $1.1764. Developments between the US and Iran remain the dominant factor in price direction for the euro. 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. If talks collapse and oil spikes back toward $100+, the euro faces two opposing forces: higher ECB hike odds  vs. crushing growth headwinds from energy costs. If a deal framework emerges, DXY drops, EUR/USD likely pushes toward 1.19+, and the ECB can afford patience.

European Central Bank President Christine Lagarde will speak today in her last remarks before the April 30 meeting. At the IMF Spring Meetings last week, she said the eurozone sits “between the baseline and adverse scenarios” and warned it’s “too early to draw conclusions” on rates. The 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 July meeting a move back from previous expectations of a hike in June and  no longer are fully priced for another 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 little changed at $1.3506. 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 will address parliament as he faces calls to resign after it emerged former US ambassador Peter Mandelson had failed a vetting process. Still, the pound remains close to Friday’s two-month high of $1.3599, however, reflecting market optimism that the worst of the Iran conflict is over.

However, the latest developments over Mandelson’s appointment as US ambassador has increased political pressure on Starmer and presents new downside risks to the pound, as a potential Starmer replacement could lead Labour policies further to the left, increasing government borrowing.

Markets have reduced expectations of tightening from the Bank of England. Expectations for year-end policy show only one move upwards is expected, at the bank’s September meeting. The weakness of the UK economy remains a limiting factor for potential tightening as market-implied odds had overshot realistic BoE policy at the beginning of the conflict.

Watch point: Signs of a diplomatic route between the US and Iran are 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 fell 0.20% to 158.94 yen per dollar as the rise in tensions between the US and Iran weighed on the currency. Bank of Japan Governor Kazuo Ueda spoke in Washington after the G20 and declined to endorse or push back on declining April hike odds; dissenter Takata still favors hiking to 1%. As a result, markets have scaled back timing of a rate hike by the BoJ and are favorable to a hike come September.

The Yen has failed to hold a depreciation past the 160 level, as expectations of government intervention and eventual policy tightening offer support. 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 0.15% lower at $0.7156, weighed down by the risk-off move in markets. 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. Markets imply a 75% chance of another quarter-point rise in May, and see rates at 4.57% by year-end (+47 bps). 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 higher in a curve-flattening move and markets respond to this weekend’s developments out of the Middle East. The 10-year yield is 1.6 bps higher to 4.26%, well below its local high of 4.44% in late March. Longer-run inflation expectations at the time-being continue to offer 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 despite the rise in tensions over the weekend.

Longer-run inflation expectations remain central to Fed policy, meaning that anchored expectations will support the case for policy easing later in the year. 2-year inflation swaps remain near 2.75% and alongside no sharp rises in longer-horizon inflation measures, markets are not pricing a scenario that requires a policy response from the Fed.

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 52.50 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.731%.

 

 

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