Markets
The US and Iran have reached a deal. The news was confirmed by all parties involved, a first. Rumours circulated since President Trump backtracked late Thursday on renewed attacks on Iran and instead announced the end of the war. He then added on Friday that an agreement was near, floating the possibility of signing it as soon as last weekend. The optimism this time around was shared by Iranian sources as well, even though the official communication from the Middle Eastern country remained more cautious. Sealing the deal over the weekend proved too ambitious, with Israel’s attack on Beirut causing last-minute frictions. But officials from both the US and Iran have now agreed to meet in Switzerland on June 19 to formally sign the agreement. The exact text of the MoU will be published thereafter, but among the provisions that matter are a 60-day extension to the April 8 ceasefire, the gradual reopening of the Strait of Hormuz and the lifting of the US naval blockade. After the signing, nuclear talks will begin. The unfreezing of blocked Iranian funds, a key demand, would be phased and dependent on the progress of those talks. This is one of the biggest risks for any deal to still unravel at a later stage. Continued military attacks by Israel in Lebanon are another. Iran had always been adamant that hostilities must end in Lebanon as well. Israel, in the meantime, has already informed the world that it is not bound by the US-Iran agreement.
Markets are keen to look at it from the positive side. Brent oil prices crashed below $90 per barrel on Friday and deepened losses today to $83.6. That is the lowest level since early March. News timing issues muddy the day-to-day comparison between US and German bonds. The combined decline in US Treasury yields since the war news flow improved amounts to 9-13 bps, including this morning’s move. German rates eased 1.5-6.2 bps in a bull steepening move on Friday and are set for a sharp drop at today’s open. Euro area money markets, for now, still assume at least one more ECB rate hike later this year. President Lagarde, in a speech this morning, justified Thursday’s move by saying second-round effects were emerging. She welcomed the agreement but added that the central bank is very closely monitoring services inflation. Asian stock markets are rallying at breakneck pace. Japanese and South Korean equities are up around 5%. European and US futures suggest a 1.5% higher open. The US dollar trades on the back foot, weighed down by risk-on sentiment and lower oil prices. EUR/USD climbs back above 1.16. The trade-weighted DXY dollar index slides to 99.4 compared with a recent intraday high of 100.31. We expect the current market sentiment to hold on a day-to-day basis ahead of this week’s key events, including the Fed, BoJ and BoE policy meetings. UK politics also return to the fore with the Manchester by-election (June 18), setting the stage for a challenge to Prime Minister Starmer.
News & Views
Inflation in Brazil in May again rose faster than expected at 0.58% M/M and 4.72% Y/Y (compared with 0.67% M/M and 4.39% Y/Y in April). As such, the Y/Y measure surpassed the upper end of the central bank’s 3% ± 1.5% target range. On a monthly basis, the increase was mainly due to higher food and beverage prices (1.33%), but several other categories also contributed, including housing (1.22%), clothing (0.62%), and health and personal care (0.9%). Transportation costs declined 0.46% M/M, but this came after an already sharp jump in March due to higher oil prices. The central bank meets this week (June 16-17). The bank cut its policy rate by 25 bps at both the March and April policy meetings. The Selic rate currently stands at 14.5%. Even though the real policy rate remains very high, the broadening of inflation into categories related to domestic demand and not solely the result of the energy supply shock might cause the BCB to take a cautious stance on further easing. The real strengthened substantially on Friday, with USD/BRL easing from 5.112 to close at 5.059. Aside from domestic considerations, some dollar weakness is also at play.
In an article in The Times, Bank of England Governor Bailey defended both the buying of government bonds by the central bank during the global financial crisis and the Covid crisis, as well as the current reduction of bond holdings. The BoE governor indicated that quantitative easing provided crucial support to the economy during periods of crisis and that the overall impact of the QE programme on taxpayers was broadly neutral. He argued that the active selling of bonds, in addition to allowing bonds to mature, tightens monetary policy, but should be paused now, as it would leave the BoE in a stronger position to purchase assets again in the future if needed.
