Last week, the Iran war again took centre stage, with economic data and other market news pushed to the background. Iran, along with the US and Israel, seemed ready to escalate their operations, which does not bode well for markets. Risk-off conditions persisted, with equities falling and the dollar advancing.
As the conflict in Iran intensifies, the US Dollar maintains its strength, with momentum shifting upward. The DXY index increased by 1.7% last week to close at 100.494. We are now approaching a technical resistance zone; if the 101 level is surpassed, a move towards 103 is possible.
The Euro remains under pressure as markets recall the adverse impact of high energy prices on the Eurozone. We observed widespread Euro weakness during Russia’s invasion of Ukraine, and a similar trend may occur as oil and gas prices surge.
Despite unfavourable UK economic data and rising gilt yields, the Pound showed remarkable resilience. Although Sterling fell against the Dollar last week, it remained relatively stable otherwise.
Commodity currencies remain more influenced by risk sentiment than by oil and commodity prices, leading to further weakness. Last week, the AUD and CAD depreciated by around 1% against the US Dollar, while the NZD dropped by 2%. In other foreign exchange movements, the JPY declined by 1%, and the CHF fell by 2%.
Oil prices surged as the conflict in Iran intensified, making the Strait of Hormuz perilous for shipping. The uncertainty surrounding oil supply and transportation has been significant, which was reflected in oil prices. WTI spiked significantly in the early part of last week, reaching nearly $120 at its peak. Ultimately, it closed 8% higher at $99.31 and remains highly susceptible to upward shocks. Should the situation in Iran de-escalate, oil prices could plummet back towards $60, although this scenario seems unlikely at present.
The ongoing weakness in precious metals is perplexing many market participants. Gold, typically a primary safe haven during times of geopolitical risk, is experiencing the opposite trend. The prevailing argument holds that rising yields due to energy-induced inflation are driving precious metals lower, though this reasoning is difficult to grasp. Last week, Gold dropped 3% to $5,020, hovering close to the critical $5,000 psychological level. Silver performed worse, declining 4.5% to $80.61. This movement in precious metals seems driven by positioning and could potentially reverse in the coming weeks.
Bonds continued to underperform, primarily driven by expectations of central bank rate hikes amid elevated energy prices. It’s debatable whether the markets are correct in anticipating hikes amid rapidly deteriorating global conditions. Last week, the 10-year UST yield rose by 14 basis points to close at 4.28%, seemingly breaking out of its 18-month technical consolidation. The 10-year Bund also fell by 1%, closing at 125.738.
Equities experienced a second consecutive negative week, indicative of a broad risk-off move. This is logical, as the war in Iran is beginning to exert a strong negative impact. Last week, the S&P 500 index fell by 1.5% to close at 6,629 points, now sitting at crucial technical support. The DAX performed better, losing only 0.6% and closing at 23,447.
Finally, cryptocurrencies are performing much better than expected, having now truly decoupled from risk assets. At the time of writing, Bitcoin is 5% higher at $70,700, and Ethereum is up 6% at $2,075.
