Market Brief: Markets Shrug Off US Attack on Iranian Nuclear Facilities

The weekend’s US bombing raids on Iran left measures of global risk appetite essentially unchanged, suggesting that traders expect Tehran to respond in a limited fashion. Both the Brent international crude benchmark and the North American West Texas Intermediate grade are ratcheting lower, with front-month prices slipping to $77 per barrel and $73 respectively after briefly hitting five-month highs in overnight trading. Treasury yields are holding steady, North American equity futures are pointing to a solidly-positive open, and the dollar is trading only modestly higher against a basket of its major counterparts.

Headline risks remain substantial, but we think a sense of fragile calm will ultimately return. Although outbursts of bellicose rhetoric (and potentially symbolic missile attacks on American bases in the Middle East) could send crude prices soaring and currency traders scurrying for safety on several occasions over the coming days, Iranian leaders have little to gain — and everything to lose — from shutting the Strait of Hormuz through which roughly a third of worldwide energy production transits. For now, reports of disruption to the flow of trade through the Strait look quite minimal, and the global economic implications should remain limited.

Instead, this week’s market outcomes should be dominated by more prosaic macroeconomic issues. This morning’s flash purchasing-manager indices will deliver the first read on whether a sentiment split between America’s manufacturing and services sectors persisted into June, while also providing valuable insight into whether price pressures have been sustained. They will be followed by the Conference Board’s consumer-confidence index tomorrow, the third estimate of first-quarter gross domestic product and May durable-goods orders on Thursday, and personal consumption-expenditure inflation numbers on Friday. The Federal Reserve’s preferred core price measure is expected to cool a touch, but even a small upside surprise could lead investors to expect a postponement in the central bank’s next round of rate cuts.

Jerome Powell’s defensive game will be tested when he faces off against lawmakers while delivering semi-annual testimony on Capitol Hill tomorrow and Wednesday. Pressure to deliver rate cuts has been building, with President Trump delivering regular social media broadsides and Governor Waller suggesting that he would support a move in July, but the latest Summary of Economic Projections — and the Monetary Policy Report itself — show central bankers gradually shifting toward a more stagflationary view of economic conditions, making it difficult to ease policy in the near term. Powell is likely to stick to his wait-and-see approach, downplaying the likelihood of a move before the autumn months.

Tomorrow, Canada will publish the first of two key inflation updates before the Bank of Canada’s end-of-July decision. Economists think an average of the Bank of Canada’s core price measures accelerated slightly in May as tariff effects flowed through, but a softer print would bolster expectations that the Bank of Canada, having stayed its hand this month, could resume easing later in the summer — an outcome that would shave more yield support from the loonie. Although weather-related factors could skew the data in an unfavourable direction, we believe risks going into Friday’s gross domestic product update are tilted to the downside, with the economy losing momentum in April and May after ‘bullwhip effects’ flattered prints earlier in the year.

Across the Atlantic, euro area private sector activity remained moribund for a second month in June, putting downward pressure on an exchange rate that has defied consensus forecasts for months. According to an update published this morning, S&P Global’s bloc-wide preliminary composite Purchasing Managers' Index held at 50.2 in early June, barely above the 50 threshold that separates growth from contraction, and below market expectations as a continued slump in France offset a modest improvement in Germany’s manufacturing sector. Preliminary June inflation prints from France and Spain arrive on Friday, just as the European Central Bank’s General Council meets (a non-policy gathering, but an excuse for well-sourced leaks), representing a possible downside threat to the common currency’s recent gains.

We’re increasingly convinced that rumours of the dollar’s death have been greatly exaggerated. There’s little doubt that the currency entered the year in an overvalued state, that the Trump administration’s tariff plans have hurt expectations for long-run growth, and that real-money investors are trying to diversify outside the US. But the speed of the decline looks overdone, and may have more to do with technical changes in the plumbing that underlies the global financial system than any shift in long-term macroeconomic realities. To wit, the Bank for International Settlements published an interesting report on Friday suggesting that the bulk of the greenback’s post-‘Liberation Day’ depreciation was driven by a jump in hedging activity among Asian investors — who have maintained exorbitantly-mismatched currency portfolios for years —with selling activity heavily concentrated during Asian trading hours. If changes in hedging behaviour run their course in the next few months (as we suspect they will), the role typically played by cross-currency rate differentials could reassert itself, lending the greenback some support against its recently-resurgent rivals.

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