Sentiment is likely to remain volatile as markets worry about ongoing tension in the Middle East. Israel’s recent retaliation to Iran’s missile strikes do not seem to have inflamed the situation. But events are most definitely unpredictable with a dangerous accident or policy misstep not far away. That means we are all oil and gold watchers at the moment. Crude especially is the key asset which moves sharply on Middle East headlines. Resistance around $90 in Brent currently looks strong.
Recent risk-off price action could continue as investors await further geopolitical developments and Big Tech earnings this week. Safe haven currencies have been in demand, led by the CHF, JPY and USD. Meanwhile, high-beta NZD, AUD and NOK could continue as the underperformers as a fully-fledged conflict is still in play. Of course, these moves will reverse if a semblance of calm appears.
The yen will also be in the spotlight due to the Bank of Japan meeting on Friday. Policymakers made the historic move to hike the rates out of negative territory last month. New economic projections out to 2026 will be watched due to inflation persistence, highlighted by the recent range of solid wage growth indications. The yen can benefit from a combined effect of lower rates and a risk correction, as well as a potential acceleration in the Bank of Japan tightening cycle, if energy prices raise inflation concerns. The 155 level in USD/JPY looks like a barrier the Japanese authorities could be defending with unofficial intervention.
PMI data for April will be of interest, as markets gauge strength of the economies at the beginning of the second quarter. While winter brought welcome news of recovery in the global manufacturing cycle, the latest leading signals point towards tentative signs of a peak in the second half. The recent rise in oil and metal prices could also dampen demand going forward. The dollar may be able to hold onto its gains more easily once geopolitical risk is priced out and the market again zeroes in on central bank divergence. This tallies with the bullish consolidation phase in the DXY.
Finally, earnings season rolls on with results from the market’s tech and growth titans released across the next few days. EV maker Tesla reports on Tuesday, Facebook parent Meta the following day and Microsoft and Google-parent Alphabet publish their results on Thursday after the US close. On the charts, tech is rolling over, and Tesla closed below long-term support last week. Nvidia’s 10% plunge on Friday, its biggest fall since March 2020, also portends a potentially volatile week ahead. Consensus is still relatively constructive for Big Tech as the group may be less affected by interest rate hikes, due to larger, and stronger balance sheets. However, they face tough quarter-on-quarter comparisons which could make for some eye-catching headlines.