Despite repeated negotiations and warnings from the IMF about the fragility of current economic trends, it feels like the clock is ticking down to the resumption of hostilities in the Middle East, particularly as there have been comments from unnamed officials that there is a strong chance of US/Israeli strikes on Iran within the next 24 hours.
One could point to the unprovoked attack from Iran on a UAE oil facility as the trigger, but the lack of an agreement since the April 8 ceasefire, partly due to US President Trump's repeated refusal to discuss a permanent peace deal based on the various plans sent from Iran, suggests that both sides are not yet ready for an agreement.
While last-minute negotiations could diffuse the current situation, there is a schism between Iran's demands and Trump's targets regarding Iran's nuclear capabilities and the Strait of Hormuz. And unless this schism is bridged, or there is an unconditional surrender from the US or Iran, the 4-6 week war originally touted by Trump would be prolonged indefinitely, causing considerable damage to the world economy.
That said, Trump's usual early-morning comments are eagerly awaited, as they will set the tone for the next developments. A more conciliatory tone, after stating yesterday that "Iran will be blown off the face of the earth if it attacks US ships guiding vessels through Strait of Hormuz" could reverse expectations.
At the time of writing, the June WTI oil future is hovering near $104, notably failing to rise above the recent peak of $110.93, while the December WTI oil future has jumped to $83.40, above the mid-March high, confirming increased concerns about oil prices remaining elevated throughout this year. A continuation of the current newsflow and further exchanges of fire between US and Iranian forces are bound to keep oil bid, with a return to recent highs on the cards.
Interestingly, European equity indices have not fallen off a cliff yet, while US stock market futures are pricing in a small positive open later today, revealing limited market angst. Buoyant earnings announcements are keeping investors content until economic data like Friday's jobs data start to point to a much weaker economic outlook. Interestingly, Bitcoin has jumped above the $80k level. A close above this level could act as a basis for another upleg if risk appetite remains upbeat.
Meanwhile, US Treasury yields are moving, with the 30-year UST yield rising to 5%, the highest level since July 2025, and the 10-year yield reaching 4.40% again. Apart from increased inflation and term premiums, debt sustainability is returning to investors' minds amidst ballooning deficits, with Middle East war and troop mobilization adding to fiscal spending.
Notably, there has been little action in the US dollar, with euro/dollar hovering near 1.1660, much higher than one would have expected given the latest developments in the Strait of Hormuz. Are FX investors not really concerned about a restart of the conflict?
The RBA confirmed expectations by hiking rates again earlier today, highlighting the inflation threat and trying to limit the extent of second-round effects. The comments that "following this rate increase, there is room to wait and observe what unfolds" and "monetary policy is well placed to respond to developments" have been interpreted as signals that the RBA could pause its rate hikes, provided that oil prices remain at current levels going forward. This explains the small drop in Aussie/Dollar today, which remains at three-year highs.
Finally, key US data are on the menu today, predominantly the pivotal ISM Services PMI survey potentially showing surging inflation and employment weakness, along with a plethora of central banks speakers, including ECB President Lagarde and numerous Fed members.