U.S. Indices closed well in the green on Monday as President Trump halted attacks on Iranian energy and power infrastructure for five days. This led to a reduction of the geopolitical risk premiums with stocks rallying and crude tumbling. Crude settled well off the overnight peaks and helped ease some of the inflationary concerns too, in turn seeing global yields move lower, particularly at the front-end, as hawkish rate bets eased somewhat from the shift seen at the end of last week. Although a welcome development, the Iranian side has largely pushed back on Trump’s claims that talks between the US and Iran were held, but Trump was adamant that they occurred. This still leaves a lot of uncertainty, but the overall messaging is a positive one with Trump making an effort to de-escalate for now. Trump has suggested talks will be held this week and a deal could be announced within five days. The developments led to a weaker U.S. Dollar due to the risk-on trade. NZD, GBP, JPY, EUR, and CHF all managed to strengthen vs USD in the risk-taking environment, while AUD and CAD lagged with marginal gains. Behind the two underperformances was likely a pullback of outperformance in recent weeks, given their energy independence. Gold was still lower, but well off the overnight lows, with the precious metal trading between USD 4,098-4,536, currently just above USD 4,400 heading into Asian trade. Silver and Bitcoin saw gains. The Chicago Fed President (Goolsbee) noted that the Fed could be back in an environment of multiple cuts, but he also sees conditions where the Fed would hike, noting the Fed are in an intense moment with a lot in the balance. Goolsbee warned that historically, oil shocks have been stagflationary, making both inflation and joblessness worse. He noted at best that inflation has stalled, and the Fed is waiting for that to go away. However, he remains optimistic that Interest Rates could go lower by year-end, but he is still awaiting proof on inflation. He noted gas prices have a high impact on household expectations, but inflation expectations remain anchored. On the labour market, he said the economy is near full employment, raising inflation concerns, while noting that inflation now appears to be the primary risk. Fed Governor Miran (Dove) confirmed he pencilled in four rate cuts this year (versus six in prior projections, but he did say this was his view pre-meeting). Despite the ongoing risks, Miran continues to push for lower rates, noting that the Fed should not be making policy based on short-term headlines and that it is premature to judge the current situation. Miran suggested he does not want to respond to oil price shocks, in case it leads to a wage price spiral, while noting that the labour market could benefit from additional support. He suggested the Fed typically looks through the first round of all price shocks, noting it would be unusual for them to focus on them this time around. However, he stressed this is not his base case, but second round effects and wage rises could require a rate hike, but current conditions do not warrant rate hikes. Miran did state he needs more clarity on whether policy should react to current events but his outlook remains for rate cuts. He also said that the balance of risks got worse on both sides. Elsewhere, Oil closed lower by 10% while Gold ended Monday’s session with a loss of 1.75%.
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