Markets Briefing: US strikes Iran for a second straight day as ceasefire collapses
Markets turned on the inflation-and-rates axis. The US struck Iran for a second straight day and President Trump declared the ceasefire over, sending oil higher and reigniting the inflation concern that has traders betting central banks will keep tightening. Minutes of the Fed's June meeting, released on Wednesday, showed a few officials saw a case for a rate rise, and money markets pulled forward the next hike (WSJ) (BBG). "Crude has reclaimed its position as the central driver of cross-asset pricing," said Dilin Wu of Pepperstone. "If oil keeps pushing higher and drags inflation expectations with it, Treasury yields will follow." (BBG)
Equities were mixed. Europe led the risk-on tone, with the EURO STOXX 50 up around 1 per cent and the DAX firmer, while Japan's Nikkei rallied on a softer yen and steadier chips. In Asia, the mood was more cautious, with Hong Kong and Korea slipping as the chip rally lost momentum, and US futures edged higher after the previous session's swings.
Central banks are drifting back towards tightening. The Fed minutes showed officials increasingly worried that the artificial-intelligence investment boom, on top of the Middle East war and tariffs, could keep inflation elevated, with nine of 18 now pencilling in at least one hike by year-end (WSJ). In Japan, a former central banker said the BoJ could push its policy rate above 2 per cent this cycle, further than most expect (BBG), and the Bank of Korea signalled it may need to raise rates (BBG). Only China stood apart, with the People's Bank pledging to keep policy accommodative (Reuters).
In currency markets, the dollar touched a one-week high before fading as doubts over the Iran deal grew (Reuters). The New Zealand dollar firmed after this week's RBNZ hike and a five-year high in local manufacturing, and sterling reached a three-week high on sticky UK pay data (Reuters) (Reuters). The yen held near multi-decade lows on intervention watch.
Government bonds extended their sell-off on the firmer rate-hike bets. Japan's five-year bond auction cleared at 2.020 per cent, up from 1.905 per cent, and the 10-year yield rose about 1 basis point, with longer maturities leading as the market signalled waning faith in the inflation and fiscal outlook. New Zealand's 10-year yield jumped (Channel NewsAsia), while Australia's 10-year yield bucked the move, edging down about 2 basis points. US Treasuries were little changed after the two-year approached its highest level this year (BBG).
Moves in commodities were mixed. Oil led, with WTI up around 1 per cent as the US-Iran fighting resumed and Strait of Hormuz traffic stalled, and analysts warned the disruption could delay a recovery in Gulf supplies (BBG). Gold and silver fell as higher-for-longer rate expectations weighed on the metals, while copper rose, shrugging off the strikes (BBG). Bitcoin was only a little changed.
The overnight data run was led by China. Consumer prices rose just 1.0 per cent in the year to June, easing from 1.2 per cent and below the 1.1 per cent consensus, while producer prices firmed to 4.1 per cent from 3.9 per cent, a near four-year high (CNBC).
New Zealand's manufacturing PMI jumped to 59.7 from 51.3, a five-year high (BBG).
Thursday is a signalling day rather than a decision day. It is topped by the account of the ECB's 11 June meeting at 13:30 CET. At that session, the Governing Council raised the deposit rate by 25 basis points to 2.25% to lean against the energy-driven inflation shock. The account will be mined for how firmly a September follow-up hike is on the table. Note that given the recent rebound in oil prices, traders have boosted ECB rate bets and now favour two 25bps hikes by year-end.
On the data front, Germany's May trade figures will be released at 08:00 CET. The US afternoon brings weekly jobless claims (14:30 CET) and June existing home sales (16:00 CET), with the Fed's Williams (15:00) and Logan (19:30) bracketing the session on opposite sides of the patience-versus-hike debate. (You can find the full Macro Roadmap here).