Donald Trump has refrained from attacking Iran's energy infrastructure, twice extending the deadline for signing an agreement with the United States. Despite initial promising reports, the market has once again begun to fear an escalation and further turmoil in the energy sectors. While the situation in the Middle East will remain the key driver for financial markets in the week leading up to Easter, it is important to note the upcoming release of several critical macro reports, including U.S. labor market data and preliminary inflation figures for March. Consequently, investors should pay close attention to EURUSD, OIL, and US500.
EURUSD
The U.S. dollar has begun to strengthen again as it became clear that Iran does not intend to negotiate with the U.S. or comply with the ultimatum presented to them. Amidst this uncertainty, we are seeing a renewed "flight to cash," with the greenback reigning supreme. This trend is supported by the U.S.'s relative geographical distance from the conflict and its high level of energy security, even though U.S. actions arguably triggered the current crisis. Regarding data, keep a close eye on the preliminary Eurozone CPI inflation on Tuesday and the U.S. Non-Farm Payrolls (NFP) report on Friday.
OIL
The oil market is currently experiencing some of the highest volatility in history. The price surge in March alone could exceed 50%; only twice before in history have we seen such a sharp monthly dynamic. These extreme moves are tied to the ongoing blockade of the Strait of Hormuz, which could lead to the largest oil market deficit ever recorded, despite global efforts to mitigate the impact. While Donald Trump has set a new deadline for an agreement for April 6th, Tehran has signaled that no negotiations are actually taking place and that the country is prepared for a long-term conflict. If the crisis is not resolved quickly, record oil prices, potentially exceeding $150 per barrel, could become the base-case scenario.
US500
Futures for the S&P 500, the most important U.S. stock index, remain very close to historical highs. Despite significant geopolitical risks, U.S. equity prices are holding steady at elevated levels. As we approach the end of the first quarter, a new earnings season is just around the corner. The market will now focus on how Big Tech is faring amidst massive capital expenditures and rising energy costs. The underlying fear remains: will resurgent inflation force another round of interest rate hikes? A similar scenario in 2022 ended in a painful downtrend for Wall Street, and investors are wary of history repeating itself.
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