Despite a sharp escalation in the Israel-Iran conflict over the weekend, global markets demonstrated resilience on Monday. Brent crude oil prices fell 2.2% to USD72.55/barrel overnight after starting the session at last Friday’s high of 78.50. Markets priced out immediate supply disruptions on uninterrupted crude shipments through the Strait of Hormuz. The S&P 100 Index rebounded by 0.9% to 6033 overnight, retracing most of last Friday’s plunge from 6045 to 5977. The VIX volatility index returned below 20 and did not repeat April’s spike to 60 on the Liberation Day tariffs. Haven demand for gold receded, sending it back to last Thursday’s levels.
The DXY Index ended overnight at 98.1, near last Friday’s level, keeping a tight range of 97.6-98.6 for a third day. While the world’s major powers – the US, EU, China, and Russia – have not shown a unified front capable of de-escalating the Israel-Iran crisis, they were not sufficiently divided to let the conflict collapse into a total war. However, the tenuous equilibrium cannot rely on reactive restraint alone. Containing the crisis will require more proactive diplomacy and regional inclusion to achieve greater convergence on minimal peace objectives and credible de-escalation tools.
USD/JPY, which returned into the upper half of this month’s range of 142.50-145.50, should be taking its cues from today’s Bank of Japan meeting and tomorrow’s FOMC. While both central banks are expected to deliver cautious holds on their rates, USD/JPY traders will focus on which central bank strikes a more dovish tone. USD/JPY sellers eyeing a return to the lower half of the range will want the BOJ to bring forward rate hike expectations from the market’s December projection even as they expect the BOJ to taper its monthly JGB purchases. While the Fed is expected to maintain its cautiously patient and data-dependent stance, the recent retreat in the New York Fed’s inflation expectations over the 1Y, 3Y, and 5Y horizons have markets speculating about a rate cut in September. Nonetheless, the Fed will now have to worry about higher oil prices joining tariffs as risks that weigh on the US economy while underpinning inflation.
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