The uncertainty factor has been kept elevated in the last week or so as there is a lot of back-and-forth tweets between the Iranian regime leader and representatives of the US administration. The reality though, is that there is an ongoing war between Iran and Israel, and the question arises if we will see any more meaningful US involvement.
In my view, I don’t even think they know themselves as it is a function of negotiating tactics and pressure points. President Trump has signaled he would give diplomacy a chance before deciding whether to strike Iran and make his decision in the next 2 weeks. Iran has maintained its stance of no negotiation with US while Israel’s assault. In the meantime, the market has become a bit numb with no real moves. Market participants seem to be sidelined waiting for more clarity in the war front. In terms of market changes, European stocks traded with a softer tone, around 1-1.5% lower on the week, with US Equities trading in a very small range, unchanged on the week. Oil seems to be the one which will be the winner of the week trading another 3.7% higher on the week.
Moreover, we had FOMC week with the FED committee leaving the deposit rate unchanged at 4.5%. The Fed’s rhetoric has stayed the same as they await to see the tariff impact on inflation. Fed chair, Jerome Powell has openly been criticized by President Trump which insists to call for lower trades. He has been quite vocal and has pointed out that any economic downturn is due to higher rates and not tariffs. There is more and more speculation that President Trump will announce the next Fed chair soon. Let me remind you that the last day for Jerome Powell is the 15th of May 2026. Markets did not really react in a meaningful way as the FED committee pointed out that they stick to the forward dot plot of 2 rate cuts this year. The market is currently pricing 47bps of cut by the end of year (see graph below). In contrary, President Trump thinks that rates should be 250bps lower from here, so we have a wide bid-offer!
In other news, the US Treasury seems to be going ahead with adjusting downwards the Supplementary leverage ratio buffers for banks to own US government bonds. This is good news for the bond market as in times of volatility US banks do not get penalized more to own bonds and this creates a bigger buyer of the asset class. Tax cut negotiations are still taking place in Congress with a self-imposed deadline of 4th of July by the US administration.
Looking ahead…
Next week we have a lot of PMI and CPI data arising from the Eurozone. Obviously, the Iran-Israel war tactics will keep the market in a more conservative approach as the extend of the escalation cannot be questioned. We are entering a blackout period in terms of issuance as earnings season will start soon. It will be a great barometer to see on a fundamental basis what has been the monetary effect of tariffs and if there will be further downplay of earnings’ forward guidance.
Written by: Michael Konstantinou, Senior Portfolio Manager
Source: Bloomberg
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