Ceasefire optimism has faded on Thursday, as the news flow turned negative from Iran. The rally in global stocks has stalled, and the oil price is higher. Brent crude oil is above $97 per barrel this morning, and this is causing a mild selloff in European bonds at the start of the trading day. European stocks are eroding some of Wednesday’s gains, and the market mood is noticeably less jubilant.
Volatility remains stable, but the impulse is to back-track on some of Wednesday’s moves as traders remain concerned about the passage of tankers through the Strait of Hormuz.
Watching the Strait
Only three ships passed through the Strait of Hormuz on Wednesday, according to official data. There are approximately 800 rankers waiting around the Strait, which suggests it could be a very long process to get ships flowing through the waterway. This could keep a floor on the oil price for now.
This is still a news driven market, and headlines are driving sentiment. Iranian officials have alleged that there have already been violations of the ceasefire agreement, and there are reports that energy infrastructure in the Gulf continues to come under attack from Iranian missiles. The talks between the US and Iran do not start until the weekend, so there is unlikely to be meaningful progress in the next 24 hours, which could keep markets range bound for the rest of this week.
Residual optimism remains
While the oil price is higher by nearly 3% on Thursday and stocks are coming under pressure, the fact that the oil price has not broken back above $100 per barrel could be a sign that investors remain hopeful of a breakthrough in the coming days, or at least firmer foundations for the ceasefire to take hold. This could limit the downside for risk in the short term, and it could cap oil price gains.
Throughout this conflict, traders have been keen to buy stocks and sell oil on positive news from the region, and we do not think that this will change. If the overall trajectory suggests that the war will come to an end, then risk sentiment should remain supported. We believe that it will take a major setback, such as the cancellation of this weekend’s peace talks, to change the overall direction for markets and for pessimism to set in.
Middle East conflict looms large for Q1 earnings season
This does not mean that the conflict in the Middle East has not had a real impact on the global economy. As the Q1 earnings season gets under way we will see how rising commodity costs are impacting corporate profits. Delta Airlines reported Q1 earnings on Wednesday. They said that they would take a $2bn hit from higher fuel costs through to June due to the conflict, and they kept full year profit guidance unchanged due to the uncertainty of the situation.
This could be a sign that investors may not get the usual sweeteners they expect this earnings season, such as profit upgrades and share buyback announcements, as companies manage the fallout from the crisis. If this leads to widespread earnings revisions, then it could have a longer term impact on investor enthusiasm for stocks. We expect the conflict to be a major theme during the Q1 earnings season, and we will be watching to see if it leads to any profit downgrades for Q2 and beyond.
Oil majors also suffer disruption due to conflict
Even Exxon Mobil, who you may expect to be a big winner from the surge in the oil price in recent weeks, announced that it lost 6% of its global production in Q1 due to closures at some of its facilities in the Gulf.
This corporate news shows that the sooner this conflict is resolved the better, and if the latest ceasefire negotiations fail, then the bigger the economic damage and the hit to corporate profits.
Ahead today, US economic data is the main highlight. The core PCE for February is released this afternoon. This data feels very out of date and is unlikely to be market moving. However, an upside surprise to core inflation could boost the dollar, which is lower today on a broad basis, the dollar index is testing the 99.00 level.
The final reading of US Q4 GDP is also scheduled for release later today, it should confirm that the US economy grew at a healthy 0.7% quarterly rate, driven by a robust consumer.
Chart 1: Brent crude oil price finds its feet as optimism about ceasefire fades
Source: XTB
The material on this page does not constitute financial advice and does not take into account your level of understanding, investment objectives, financial situation or any other specific needs. All information provided, including opinions, market research, mathematical results and technical analyzes published on the Website or transmitted To you by other means, it is provided for information purposes only and should in no way be construed as an offer or solicitation for a transaction in any financial instrument, nor should the information provided be construed as advice of a legal or financial nature on which any investment decisions you make should be based exclusively To your level of understanding, investment objectives, financial situation, or other specific needs, any decision to act on the information published on the Website or sent to you by other means is entirely at your own risk if you In doubt or unsure about your understanding of a particular product, instrument, service or transaction, you should seek professional or legal advice before trading. Investing in CFDs carries a high level of risk, as they are leveraged products and have small movements Often the market can result in much larger movements in the value of your investment, and this can work against you or in your favor. Please ensure you fully understand the risks involved, taking into account investments objectives and level of experience, before trading and, if necessary, seek independent advice.
