Market Brief: Markets stall amid lack of progress in Mideast negotiations

Yesterday’s rally in global financial markets is running out of momentum as investors await evidence of tangible progress in negotiations between Washington and Tehran. Iran is reportedly reviewing a one-page, 14-point US proposal under which sanctions would be lifted and the Strait of Hormuz opened to shipping in exchange for a suspension of nuclear enrichment activities*. Oil prices are stabilising, with Brent settling near $100 a barrel and West Texas Intermediate oscillating around $93. Yields are little changed, equity futures are setting up for incremental gains at the open, and the greenback is moving modestly lower against a basket of its major counterparts—including the Canadian dollar, which is politely waiting for its double-double before getting the day started.

The British pound is edging higher and measures of implied volatility remain subdued as local elections get underway, suggesting that traders think the results are mostly priced in. Nigel Farage's Reform is expected to peel off Conservative voters, yet Labour is expected to suffer its heaviest losses at the hands of the Green Party, raising the risk of a leftward lurch in policymaking once the polls close. A hawkish reassessment of the Bank of England's reaction function, triggered by the energy shock and its inflationary consequences, has nonetheless lent sterling some structural support. We think any election-driven moves are likely to be modest**—at least relative to the more alarmist scenarios seen in recent sell-side research notes.

Trading ranges in the Japanese yen are narrowing after repeated intervention efforts succeeded in drawing a “line in the sand” at 160, but failed to push the exchange rate materially beyond the 155 threshold against the dollar. As market participants return from the Golden Week holiday and volumes snapping back to normal, traders are keeping a watchful eye on the Bank of Japan—which retains abundant firepower—while monitoring developments in global rate markets, where an accumulation of hawkish central bank rhetoric has tilted differentials against the yen. With the range of potential outcomes seemingly having narrowed, we suspect the currency’s appeal to carry traders has been heightened, and that flows into foreign asset classes could rebound, exposing global investors to the sort of “risk on, risk off” dynamics that bedevilled them*** after the global financial crisis in 2008.

This morning's weekly jobless claims data will help set the stage for tomorrow's US non-farm payrolls report. The consensus expects a gain of roughly 55,000—a sharp deceleration from March's strike-inflated 178,000, yet still healthy for a labour market contending with a shrinking pool of new entrants. Conviction is low: data published earlier in the week by the Bureau of Labor Statistics and ADP were consistent with continued strength, but other indicators suggest most businesses are maintaining their “low-hire, low-fire” posture, limiting the scope for month-on-month job creation. The calculus for the dollar is straightforward: a print well above consensus, combined with sticky inflation from elevated energy prices, would bolster the case for the Federal Reserve holding rates into the autumn and lend the greenback fresh support. A miss would revive easing bets and weigh on the currency.

Banco de México is all but certain to lower its benchmark rate by a quarter-point to 6.50% this afternoon—a move fully discounted by markets since Governor Victoria Rodríguez Ceja told the Senate last week that “one last adjustment” was in the offing. Most analysts expect the accompanying statement to retire Banxico's explicit easing bias and signal that the cutting cycle that has delivered 475 basis points of relief since mid-2024 is now complete. With fixed investment contracting for a seventeenth consecutive month, first-quarter gross domestic product shrinking by a sharper-than-expected 0.8 per cent, and inflation pressures concentrated in imported food and energy rather than domestic demand, the case for parking the policy rate at the centre of the estimated neutral range looks compelling, and markets are pricing no further adjustments through the end of next year. The peso, up roughly 4.5% year-to-date, has lost some momentum as rival carry destinations—especially the Brazilian real, buoyed by commodity windfalls—have drawn more attention. Still, a wide rate differential with the United States and a relative absence of commodity-driven speculation**** should lend the currency continued support, even if the outsized gains of recent years are unlikely to be repeated.

*If this sounds a lot like 2015's Joint Comprehensive Plan of Action agreement, it's because it does.

**Yes, I'm tempting fate with this one.

***Also FX analysts. Spare a thought for the poor FX analysts.

****An unwind in commodity prices—a strong possibility once the war in the Middle East reaches its conclusion—could trip up the Brazilian real after its strong run over the past year.

Market Overview

Data as of 7:15 AM EDT

Notes: DXY: Dollar index, ON: Overnight movement, DMA: Daily Moving Average, Pivot points are calculated on a one-month basis, 3-month and 10-year spreads are against USD, Implied V.: implied at-the-money option volatility

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