Markets
In less than a week (1) Iranian civilization was on the verge of being wiped out, (2) before Pakistani mediation resulted in a two-week ceasefire, and the first high-level talks over the weekend only for 3) it collapsed after 21 hours, de facto returning us to (1). After negotiations collapsed, the Trump administration announced a blockade of the Strait of Hormuz – effective 4pm (our time) – to deprive Iran of its remaining oil revenues. The Middle Eastern country responded by threatening regional ports if enemy ships attempted to penetrate its territorial waters. Trump then upped the ante by suggesting attacking critical infrastructure like water and power plants, “which are very easy to hit.”
The market’s reaction to the latest developments is not to take risks, but in a cautious manner. In theory, a ceasefire has been agreed until April 21, leaving some time (however limited) for de-escalation and diplomacy. The Axios news site reported that in the coming days, Pakistan, Egypt and Turkey will continue to mediate with the United States and Iran, and some negotiators, especially on the Iranian side, kept the door open for further talks. Needless to say, the situation is very unpredictable. Pending the outcome, stocks are losing ground in Europe and the United States. The likes of EuroStoxx50 fall 1%, Wall Street opens 0.3%-0.7% lower. Global yield curves are flattening gently as higher oil prices (Brent back above $100) and gas (Dutch ETF futures +9%) increase bets on a rate hike. The market probability of an ECB move in April rose from around a third to 45% with a cumulative 70 basis point increase in interest rates for 2026. German interest rates rose by 2-3 basis points, slightly underperforming against swaps and Treasuries. The latter loses slight gains, resulting in 1 basis point increases. UK bonds are the laggard as interest rates across the Channel added between 2.5 and 4 basis points. Forex investors slightly favor the US dollar over most of their global counterparts, but the gains are technically minimal. DXY is creeping towards the 99 barrier. EUR/USD is struggling to hold the 1.17 area but is far from intraday lows. The Japanese yen is among the worst performers. A speech by Bank of Japan Governor Ueda (see below) quelled some lingering speculation about a rate hike in April. USD/JPY is approaching the symbolically important 160 mark again, and EUR/JPY has reached all-time highs. The Hungarian forint in the CE zone is rising towards four-year highs, breaking important resistance around 367.7 EUR/HUF (highs in 2023 HUF) in the process. This step comes after the landslide victory achieved by the pro-European TISA party in yesterday’s elections. He secured a two-thirds majority, giving him the power to rewrite the constitution and undo Orban’s 16-year rule that often clashed with the European Commission. Hungarian interest (swap) rates are falling by around 40 basis points (!) with lower risk premia driving the move.
News and opinions
The German government approved a financial package worth 1.6 billion euros to contain fuel prices. Over two months, the gasoline tax will be reduced by 17 cents per litre. Other smaller measures include a tax-free employer subsidy bonus of up to €1,000, stricter antitrust control of fuel prices, and potential tax or regulatory measures on oil companies’ excess profits. Earlier this spring, Spain (€5 billion), Italy (€3-4 billion), Ireland (€1.6-1.8 billion), Greece (€0.3-0.4 billion) and France (€0.1-0.2 billion) announced similar temporary relief measures. There is some clear fragmentation between broad, consumption-intensive packages in southern Europe and a more limited response in the likes of Germany and France which are either fiscally constrained or wary of a repeat of huge subsidies like 4 years ago.
Japanese financial markets reduced the Bank of Japan’s bets on raising interest rates in April from 55% to 33% following a speech by Bank of Japan Governor Ueda, which was read by his deputy Himono. He noted that oil prices are pushing energy costs higher in the short term, but their impact on core inflation is uncertain. “If the output gap worsens, this could affect core inflation. On the other hand, if higher crude oil prices raise general inflation expectations in the medium and long term, this could lead to higher core inflation.” Given continued uncertainty regarding the Middle East, the Bank of Japan will examine how future developments impact the outlook. While vigilance is necessary and the core CPI is still on track to reach the 2% target, the BOJ Ueda has not fully embraced a near-term rate hike scenario.
