Risk bid as Middle East tensions ease

Fragile ceasefire steadies sentiment

Despite the week starting risk-off – after a return to hostilities between Iran and Israel over the weekend that threatened to derail any peace talks – things turned around after a call between US President Donald Trump and Israeli Prime Minister Benjamin Netanyahu. This prompted both the US and Iran to ease attacks, and risk assets caught a bid on the back of the development.

The geopolitical picture remains the dominant variable for energy markets and is deeply unsettled. Oil prices are lower this morning, with Brent crude and WTI down more than 1% at US$93 and US$90, respectively. This follows both benchmarks paring Monday gains after news that Israel and Iran halted attacks.

In the equity space, US benchmarks caught a bid on Monday after a meaningful decline on Friday, fuelled by AI concerns and strong US jobs data. However, I must add that the initial dip-buying impulse at the start of yesterday’s session quickly faded, with an end-of-session push lower.

Asian markets followed suit, recording sharp rebounds across the regional indices. Japan’s Nikkei 225 rallied nearly 2%, though it remains within the previous day’s range. South Korea's KOSPI climbed sharply, adding more than 7.5% and closing at the previous day’s range highs – a solid day, backed by SK Hynix jumping roughly 11% as investors returned to the AI trade with evident enthusiasm.

Bonds and FX: Payrolls place the USD back in the driving seat

Undoubtedly, last Friday’s US payrolls report was a substantial beat, surpassing economists’ maximum estimates and prompting a jump in shorter-dated US Treasury yields, with markets all but fully pricing in a Fed rate hike by year-end. The USD naturally rose on the back of the release, particularly against the EUR.

This throws a bright spotlight on tomorrow’s May US CPI inflation print. Consensus suggests headline YY inflation reached 4.2%, marking the highest level in more than three years. An upside surprise would almost certainly put renewed pressure on equities and lift the USD.

US CPI and BoC: Tomorrow’s twin risk events

All in all, we have another subdued data slate ahead today; therefore, geopolitical headlines will remain front and centre. Tomorrow, as noted, things heat up with the US CPI inflation number, followed by a BoC update expected to keep rates on hold at 2.25%.

The BoC decision could be an interesting one to watch, with year-end pricing implying 35 bps of tightening – at least one rate hike. Despite optimistic rate pricing and a solid jobs report last Friday, Canada’s GDP growth flatlined in its latest report. While headline energy-driven inflation has risen, the core metric has eased in recent prints. So, all the attention will be on the central bank’s communication tomorrow. If the BoC pours cold water on market-tightening expectations, it could send the CAD southbound.