Morning Bid: Big relief rally, for now

(Corrects error in byline field)

April 8 –

A look at the day ahead in U.S. and global markets from Alun John

Markets exhaled on Wednesday after news of a two-week ceasefire between the U.S. and Iran, first announced by U.S. President Donald Trump on Tuesday evening, shortly before his deadline for Tehran to reopen the Strait of Hormuz.

Oil prices dropped below $100 a barrel on the announcement, while stocks and bond prices spiked and the dollar shed some of its recent safe-haven allure. But traders and analysts will be wary about the staying power of the ceasefire and the prospects for a long-lasting resolution to the war and energy shock.

I’ll get into that and more below.

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BIG RELIEF RALLY, FOR NOW

Pretty much every global asset has been focused on the oil price since the start of the Iran war, so it’s not surprising that with news of the ceasefire sending both Brent and WTI futures back well below $100 a barrel, we have seen some big moves around the world.

In equities, S&P 500 futures are up 2.5%, while major indexes in Europe and Asia have surged, posting or set to post their biggest daily gains since April last year. Japan’s Nikkei gained over 5% and South Korea’s KOSPI more than 6%, while Europe’s broad STOXX 600 was up by around 3.5% in early trading.

It’s the key beneficiaries of cheaper energy and falling yields that are leading the charge – travel, banks, tech and industrials – and a South Korean standout was chipmaker SK Hynix’s 15% rise, helped by high expectations for its own results after peer Samsung’s monster quarterly profit forecast on Tuesday. Energy stocks are the biggest fallers on the day, but they’re still well up on the year.

The safe-haven greenback slipped, meanwhile. The dollar index fell from recent 11-month highs as the U.S. currency retreated on all developed market peers – even the under-fire Japanese yen, which retreated from the 160-per-dollar level after nearly crossing that threshold on Tuesday.

Bond prices have surged on the announcement, with U.S. Treasury yields falling as traders brought the prospect of Fed rate cuts back to the table. Euro zone government bond yields also fell, with traders scaling back bets for rate hikes from the ECB. But the biggest moves have been in Britain, where yields are down over 20 basis points.

Traders will be hoping that the two-week ceasefire is effective and lasts as intended. It’s conditional, of course, on Tehran reopening the Strait of Hormuz, which it said it’s prepared to do if attacks on Iran cease.

Markets certainly aren’t telling us we’re out of the woods yet. Brent above $90 would have been seen as a bad thing for the world economy and stocks just a couple of months ago, and we aren’t anywhere close to the amount of central bank easing priced just before the war.

So, to keep the optimism up, U.S.-Iran negotiations – slated to begin on Friday – will need to lead somewhere brighter than before, with a number of thorny issues likely to prove contentious.

Still, news of the ceasefire marks a night-and-day difference compared to President Trump’s increasingly bellicose rhetoric and threats earlier in the week, and the relief rally reflects that.

Chart of the day

A temporary halt in fighting and the reopening of ​Hormuz would allow Middle Eastern exporters to ship significant volumes of oil that have been trapped inside the Gulf since hostilities began, offering global energy markets some ⁠immediate relief, writes ROI Energy Columnist Ron Bousso.

Today’s events to watch

* U.S. 10-year note auction (1 p.m. EDT)

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(By Alun John)