Trump rejects Iran plan, risk markets remain relatively calm

Back to square one for Middle East negotiations

Despite another build-up of expectations after the pause of ‘Project Freedom’, a comprehensive agreement between the US and Iran remains elusive, as US President Trump rejected another proposal from Iran by branding it as “totally unacceptable”. The key points of disagreement are mostly known and centre around the control of the Strait of Hormuz and Iran’s nuclear future.

On face value, the latest developments increase the likelihood of renewed confrontations, especially as Israeli PM Netanyahu continues to talk about “dismantling Iran’s enrichment facilities and destroying ballistic missile production”, which are red flags for the Iranian regime.

However, pending a surprise, Trump is expected to flip-flop again and give diplomacy another chance. That said, he will have to decide at some stage what he wants to gain from this war in order to agree on ending the two-and-a-half-month conflict, and reopening Hormuz. Unless, of course, his target is to choke countries like China – Trump’s planned visit to Beijing on May 14 and 15 is clearly the event of the month – and India, which were the main importers of Iranian oil, while also creating growth problems in the eurozone.

Oil reacts to headlines, equities do not fear Fed hikes

Trump’s response to the Iranian proposal has pushed oil prices slightly higher at the time of writing. The June WTI oil future is flirting with $100 once again, and the December contract has risen to $82, both erasing last week’s dip on the back of optimism about the short-term outlook. Risk assets have taken notice of these developments, with both euro/dollar and gold gapping lower. The moves are relatively measured, with the former currently hovering around 20 pips from its Friday close, and gold being around $50 in the red today.

Following a robust week, with the Nasdaq 100 index leading the weekly rally, futures point to a small negative open in US equity indices today. That said, investors are relatively satisfied with last Friday’s solid set of data, with the strong nonfarm payroll figure and the unexpected deceleration in average hourly earnings understandably fueling risk appetite.

Equity holders enjoyed the strong labour market report, mostly ignoring further warning from the consumer sentiment surveys, while also feeling secure about the possibility of Fed rate hikes. Despite recent reports showing a sizeable acceleration in inflationary pressures, the imminent arrival of Kevin Warsh at the Fed is keeping rate expectations at bay for now. Notably, only 5bps of Fed tightening is currently priced in compared to 67bps worth of rate hikes in the case of the ECB.

This thought process could be challenged, though, as the CPI, PPI and retail sales reports for April will be released this week, starting with the consumer price index data tomorrow, with economists looking for another acceleration in the headline CPI figure to 3.7% from 3.3% in March. More importantly, the full Senate vote to approve Warsh as the new Fed chair will take place later today, starting the countdown to finally hear his current monetary policy stance. Most economists remember Warsh’s previous stint at the Fed, when he was hawkish, but they underestimate Trump’s influence.

Both yen and pound in focus

Despite the recent BoJ intervention, dollar/yen is still trading in the 157 area. A potential glide higher would bring back memories of April 2024 when the initial intervention pushed this pair down to 151, but, within three months, it rose back to 161. That rally triggered a forceful reaction from the BoJ and a protracted decline to the 140 zone.

Meanwhile, following last Thursday’s disastrous local elections result, British PM Starmer is on thin ice. He is set to speak later today, highlighting the priorities of his government, but calls from within the party and labour union are multiplying for him to step down and allow a fresh face to take over, and try to salvage the tiny Labour chances of winning a second consecutive general election soon.