Tuesday, June 25, 2019

Risk aversion grips the markets as Trump imposes harsher sanctions on Iran

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MORNING BRIEFING

Safe havens gain as tensions between the US and Iran rise after Donald Trump imposed additional sanctions on the Middle Eastern country and its leader, Ayatollah Khamenei. The Yen edged higher versus the greenback and Gold extended its rally towards the $1,440 area while the Euro and the Pound scored a small advance. Apart from the developments in the geopolitical arena, the focus today will return to the Dollar, with the release of the US Consumer Confidence figures and Jerome Powell’s speech bound to attract investors’ attention. Equities closed marginally lower yesterday and futures are pointing towards a slightly bearish opening bell this morning.

Risk appetite deteriorates on the back of Trump’s decision to proceed with more pressure on Iran and the response from their side that the diplomatic path is now closed “forever”. Market participants are taking to the safety of the Yen and Gold as a response, with both instruments extending their rallies overnight. Both the Japanese currency and the yellow metal have benefitted from the decline in the Dollar after the Fed opened the door for an easier monetary policy and given the developments with Iran, their rallies may not be over.

Furthermore, Jerome Powell’s speech today and the release of the Consumer Confidence figures from the US may provide further stimulus to the Dollar bears. The head of the Fed will take questions on whether he agrees with his colleagues that are seeing the need for two rate cuts by the end of the year. If he sounds reassuring that the Fed will act “if” necessary then the Dollar may get a small boost, otherwise a consistent bearish tone could push the US currency to deeper lows. Dollar/Yen is currently trading around the 107 area but more downside pressure would drive prices towards the 106.50 mark.

Sterling failed to make a meaningful advance above the 1.2750 figure yesterday as worries regarding the manner of the UK’s exit from the Union resurfaced. Boris Johnson, who is presumed to be the next British PM, reiterated his views that Britain will leave the EU on October 31st, even if that means a no-deal Brexit. Senior Tory MPs however warned him that if he pushes such a plan forward, it will be met with stiff resistance. From a technical perspective, Sterling is seeing momentum to the upside slowing down but the way forward in the short term hinges more on Powell’s remarks and the Dollar’s price action.

Gold advanced yesterday making its way to the $1,440 area as the Dollar continued its decline and 10-year yields dropped below the 2% mark again. The yellow metal is benefitting from the greenback’s weakness and as we mentioned yesterday more gains could be seen in the near term. However, we also need to be mindful of Oil’s price action, as higher prices have driven inflation expectations to the upside, further contributing to Gold’s advance. As such, if Oil sees a decline at some point those inflation expectations will be adjusted lower again and Gold could lose some of its support.

Finally, equities closed in the red yesterday in Europe and the US, with the exception of the Dow Jones that scored a marginal 0.03% gain. With market participants growing worried over the US-Iran confrontation while equity indices are testing their recent highs, the focus will now fall on the G-20 meeting. Donald Trump is expected to meet with his Chinese counterpart and the tone coming out of this sit-down will be key in either helping stocks proceed higher or take a break from their rallies. In the interim, equity traders are adopting a “wait and see” approach, with futures on either side of the pond pointing marginally lower.

MARKET EVENTS TO WATCH

  • US Consumer Confidence Index - 6pm
  • Fed’s Powell Discusses Economic Outlook and Monetary Policy - 9pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research