The week ahead: Market euphoria as Iran/ US reach deal to end the war

Geopolitics are dominating markets this morning, after news broke overnight that Iran and the US and Iran had agreed to extend their ceasefire and to reopen the Strait of Hormuz. After waiting more than 2 months for a deal to finally be agreed, it is here, although the Strait will not reopen until the deal has been signed this Friday in Switzerland.

Oil prices fall comes at auspicious time for central banks

The market reaction has been swift, the oil price is down nearly 5% this morning, and Brent crude is trading just over $83 per barrel. Over the past month, the price of oil is down by more than a fifth, and the Brent crude price is now back at levels from early March. This is good news for inflation, which should start tumbling monthly from June, and it could ease concerns about price pressures as we lead up to some major central bank action this week. The decline in the oil price also raises questions about whether the ECB was too hasty in raising rates last week.

The stock market has also surged, the Nikkei is higher by nearly 5% this morning, European and US futures are also on track to extend Friday’s gains. The Nasdaq is pointing to a gain of nearly 3% later today, the S&P 500 could rise by more than 2%. The FTSE 100 and the Dax are also pointing to gains of more than 1.5% later this morning.

This is the first time that a deal has had legs, with both sides agreeing to the terms, and real prospects that the Strait of Hormuz will open, toll free, later this week. This diplomatic breakthrough comes after months of waiting for both sides to agree to bring the war to an end. Now that the war is essentially over, and if the deal is signed later this week, it takes away a major constraint for risky assets: reduced oil supply. This is good news for European stocks, which remain below pre-war levels from late February. It could also extend gains for the tech sector, which jumped by 2.5% last week, although there were some big outliers like newbie SpaceX.

A peace deal puts downward pressure on the oil price and thus reduces inflation concerns. This comes at an interesting time, as we lead up to a major week of central bank meetings. The BOJ, RBA, BOE, Fed and the SNB all announce their latest policy decisions this week, which could shift the focus from Elon Musk, at least for a few days.

It is worth noting that although inflation is a major concern right now, inflation trends suggest that the pass-through effect is weaker than originally assumed. Producer prices and headline inflation are rising sharply, for example, US headline CPI rose above a 4% handle for the first time in 3 years, yet this is not feeding into core inflation, which adjusts for the price of commodities, or higher wages.

The bull case for SpaceX, it’s technical

The dust has settled on the biggest IPO in history. SpaceX closed higher by nearly 20% on Friday, up from the IPO price of $135 per share, valuing the company at $2.1 trillion. The stock is also higher by another 3.5% in the pre-market on Monday. The focus is now on whether the stock price will continue to extend gains, even though there are genuine fears about the company’s fundamentals, including the fact that it is loss-making. However, it’s easy to be a bear when it comes to SpaceX, the bull case is harder for analysts to make using conventional metrics. For some traders, the faith and belief they have in Elon Musk to monetize SpaceX is triggering a wave of buying action.

Looking ahead, SpaceX’s share price may continue to see upward pressure from passive index funds. SpaceX is not a traditional IPO, and it has been fast-tracked for inclusion on some equity indices. It will join the MSCI Standard and Large Cap index on June 29^th, the FTSE Russell on 26^th June, and the Nasdaq 100 on July 6^th, the next time it rebalances its components.

Why July could be a tough month for SpaceX

Inclusion on the Nasdaq 100 is a powerful structural catalyst for SpaceX and passive investment funds will need to buy between $7bn and $8bn of stock around the inclusion date. Passive funds will need to do this regardless of SpaceX’s fundamentals, because it needs to ensure that they follow the Nasdaq 100’s participants step for step.

Those looking for SpaceX’s share price to decline may need to wait until after the 6^th July, when an air pocket could develop once the passive buying is over. This could add a significant amount of selling pressure to the stock, along with the company’s lock-up period, which ends late in the summer. This will allow more SpaceX shareholders to sell their stakes, which could be a powerful headwind for the stock price in the coming months.

There is every chance that SpaceX’s stock price will take a pause in the coming days; however, we think that momentum remains high across markets. SpaceX’s powerful market debut had a broader effect on global markets. The S&P 500 and the Nasdaq both rose on Friday, although the Nasdaq 100 posted a weekly loss of over 1% after a bout of earlier volatility. The FTSE 100 outperformed its US counterparts and rose by 1% last week. The smaller cap Russell 2000 in the US rose to a fresh record.

Investor optimism set to continue  

SpaceX wasn’t the only stock rising to a record high, 35 other stocks on the S&P 500 rose to a fresh 52-week high. However, the euphoria didn’t stop US equity funds experiencing outflows last week, which is the first time in 3 weeks. This could suggest that SpaceX’s unbelievable IPO was for some a sign that they should sell out of their US holdings and look for better value opportunities elsewhere. This is a theme that is worth watching in the coming weeks, especially now that geopolitical risks have been substantially reduced.

Government bonds rose last week, and yields fell sharply around the world. In the UK, 2-year Gilt yields fell 12bps, while the 10-year Gilt yield fell 3.9bps, bringing its monthly decline to 27bps. In the US, Treasury yields also dropped by 5bps for the 2-year and 3bps for the 10-year, after the sharp drop in the oil price as mentioned above. The dollar was also broadly lower last week, as hopes were high that a deal between the US and Iran would finally materialize.

 The euphoria over the SpaceX IPO will give way to a focus on central banks in the coming days,  in particular the Fed. The focus will be on Kevin Warsh, the new chairman of the Federal Reserve, and his press conference. Below, we look in more detail at the key events to watch this week.

FOMC Meeting: Kevin Warsh’s debut as chair

The backdrop to Wednesday’s Fed meeting is improved US economic momentum and elevated levels of inflation, while this could have led to the Fed moving to a hawkish stance, we think that a rate hike later this year is off the cards now that the war in the Middle East is over, and the oil price could fall further. The market is currently pricing in a 55% chance of a 25bp hike by the end of 2026, but we expect this rate hike to be priced out in the coming weeks, if the peace deal holds.

Although the Fed is expected to keep rates unchanged next week, expectations for inflation, and even interest rates, and the FOMC statement are worth watching, as the Fed could still drop its easing bias and even emphasize the possibility of a rate hike in the future if inflation does not moderate quickly. The uber dove Stephen Miran has left the FOMC board, so we expect a unanimous vote to remain on hold. At this stage, we very much doubt that Kevin Warsh will dissent from the majority, and he is unlikely to bow to President Trump and vote for a rate cut on Wednesday. It will be worth watching President Trump’s reaction to the decision later this week.

Warsh’s first press conference is a market-moving event. He is likely to say that economic conditions do not justify a hike at this time, however, he could reiterate his long-held view that tech investment, especially in AI capabilities, will boost productivity in the future without stimulating inflation. This could imply that rate cuts are possible in the medium and longer term, which could mean a lower neutral interest rate in future.

This could temper any hawkish message contained in the FOMC statement. The Updated Fed forecasts are also worth watching, and they may include healthy growth forecasts and elevated inflation for the rest of this year. The updated Dot Plot will also be released. It may show that more officials are expecting to see higher rather than lower rates by year end. However, the market reaction may be mild, especially if Kevin Warsh reiterates his view that forward guidance is worthless and doesn’t give a clear picture about what the Fed will do next.

On balance, we expect the Fed to signal that an extended pause is likely at this meeting. It will be an unusual meeting for several reasons. Firstly, although Jerome Powell is no longer chair, he will stay on as an FOMC member, which is highly unusual. Added to this, Kevin Warsh may abstain from the Dot Plot forecast, which would lessen its market impact, in our view.

The dollar will be in focus after the FOMC meeting. After the last FOMC meeting, and the prospect that the Fed’s easing bias could be discarded, the dollar has been in a bullish uptrend, with strong gains in the past months vs. the JPY, the EUR, AUD, CAD and GBP. The greenback could come under pressure this week if the Fed fails to deliver a hawkish shift, and on the back of reduced geopolitical risks.

BoE meeting

Economists are unanimous that the BOE will remain on hold this week at 3.75%. Analysts expect an 8-1 vote split in favour of remaining on hold. The focus will be on how the bank reacts to the latest deal to end the war in the Middle East. The decline in the oil price since the end of May may placate some of the BOE’s most ardent hawks, and the BOE could now be less hawkish than some expect. Overall, we do not think that the BOE will hike rates this year, even if the BOE needs to be mindful of inflation risks.  

There have been mixed data trends in the UK in recent months, most recently April GDP fell 0.1%, and although headline inflation is surging, core CPI is rising at a more moderate rate. Ahead of this meeting we will get the latest CPI and labour market report, which could see bigger market moves, especially if the data deviates widely from expectations.

Data watch

Aside from central bank meetings, there will also be a large amount of macro data to digest this week, especially in the UK. The UK CPI rate will be released on Tuesday, along with producer price data. Producer price data for May is likely to remain elevated as the oil price did not fall substantially until later in the month. However, any sign that growth in producer price data is easing will be welcome news for stock market bulls and for the Gilt market, and it may weigh on Gilt yields even further in the coming days.

As we have seen elsewhere in the world, including the US, the upward pressure has not translated to higher core price inflation or wage growth. Core CPI in the UK could come in at 2.7-2.8%, although headline inflation is expected to rise above the 3% handle. UK labour market data is also scheduled for release this week, and the unemployment rate is expected to remain steady, but elevated at 5%. UK wages will also be in focus. Wage growth in the UK, which has been sticky in the past, could moderate for the three months to April, to 3.3% for average wage growth ex. Bonus, vs. 3.4% in the 3 months to March. This would suggest that the energy price spike has not had a pass-through effect to wages yet, which could ease inflation fears at the Bank of England.

Overall, the diplomatic breakthrough in the Middle East has shifted the dial ahead of the major central bank meetings this week. It is also a powerful driver of stock markets, which are in buoyant mood, and we could see further declines in the price of oil.