Geopolitics on the radar

In focus today

Geopolitics are expected to be the main market driver as the data side remains relatively quiet. The main data release is set to be the Central Bank of Hungary's rate decision, which we - and the consensus - expect to be unchanged at 6.50%. Additionally, CPI figures for Canada will be released just after.

Economic and market news

What happened yesterday

In the Middle East, the ceasefire between Israel and Hamas resumed in the wake the most recent exchange of violence. Both sides, along with US President Trump, agreed that the brokered ceasefire remains in place.

In the trade war, the US and Australia signed a critical minerals deal, with both nations committing to invest over USD 3 billion in critical mineral projects within the next six months. The deal includes the Pentagon investing in a gallium refinery in Australia and Australian pension funds increasing investments in the US by almost USD 1 trillion to USD 1.44 trillion in total.

Equities: Global equities kicked off the week with a strong risk-on flavour, at least at first glance, as major indices rose more than 1% across regions and, broadly, across sectors. The US led the cyclical tilt, but gains were widespread. That said, despite the strong equity performance, the cyclical rotation, and a lower VIX, this was not a classic risk-on day.

Long-end US yields moved lower, gold continued its surge, and oil actually fell. In other words, this looked more like an "everything rallies" driven by liquidity and optimism rather than renewed confidence in macro fundamentals. Such rallies tend to have a disinflationary bias, with easier financial conditions feed back positively into the broader economy, but without necessarily signalling a strong fundamental reacceleration. In the US yesterday, Dow +1.1%, S&P 500 +1.1%, Nasdaq +1.4%, Russell 2000 +1.9%. Asian equities are higher again this morning, and both European and US futures are extending the positive tone.

FI and FX: Market optimism carried into a relatively quiet start to the week, with risk assets performing well. Front-end US yields were broadly unchanged, while the 10-year Treasury yield declined 4bp, once again moving below 4.00%. The move left the US curve modestly bull flattening. EUR/USD is drifting lower, with the USD broadly firmer across the G10 to start the week. USD/JPY has moved higher toward 151, as the JPY weakens across the G10 with Sanae Takaichi set to become Japan's next prime minister. EUR/SEK price action has been defined by the broader 10.90-11.10 range. Similar to SEK, the Norwegian Krone also enjoyed the improving risk appetite during yesterday's session with EUR/NOK completing the full move down to the 11.70 support level.