Introduction
The war in the Middle East is becoming more complicated by the minute. A supposed ceasefire is contested from both sides, with opinions diverging on whether the situation is de-escalating or escalating. On top of that, we seemingly need to drop our binary mode of thinking, where either the situation is getting worse or better and instead realize the situation is multi-dimensional.
Global Macro
RBNZ Rate Decision
The Reserve Bank of New Zealand delivered this week’s only interest rate decision and as expected, kept rates exactly where they were, at 2.25%. The RBNZ has been in a clear rate cutting environment ever since the latter half of 2024, but the current surge in energy prices, has forced the central bank into a wait-and-see pose.
FOMC Meeting Minutes
At the time of the actual FOMC meeting, all we know is what the board as a collective has decided, along with a press conference from the chair. However, the meeting minutes (which were released this week) give us insight into the internal discussions, and the way certain Fed members are seeing the rate path.
Analyzing these meeting minutes, allows us to come to the conclusion that the stance from most members has materially shifted compared to the February meeting. Instead of the ‘higher for longer’ environment which we were dealing with at first, we are now looking at the very real possibility of rate hikes later this year.
The 50% rise in front-month Oil contracts is the main cause here. Combining that with the lack of hiring which we are currently seeing makes the economy very vulnerable. Hiking rates could push the economy into a recession territory, but keeping them where they are could see inflation move back to the 2022 highs.
Equities
Indices have had a very strong week across the board, driven by a ceasefire between the U.S. and Iran. However, the current truce seems rather shaky at best, and this is not something that markets are looking past. Instead, market participants are gradually dropping their binary view where a continuation of the war immediately leads to an extended closure of the Strait of Hormuz (the most consequential part of the war for equity markets). Instead, they are more and more pricing in the possibility of an extended war, but with a reopening of the Strait of Hormuz. This would allow oil and other trade to flow through to a rate closer to pre-conflict standards and thus prevent the global economy from hitting the wall head-first.
S&P 500 on the Daily Timeframe
From a technical perspective, our previous zones which have been drawn in for months now, still continue to be extremely relevant. The upper end of the lower zone at $6,570 gave price the support it needed for the further rate push later this week. In the meantime, price is now negotiating with the $6,792-6,812 area and has seemingly accepted above it.
In an ideal situation, we’d see Friday’s candle (which is still forming) continue to sit above the level, and only retest the area next week. This is because time spent above a level after breaking through it signals acceptance of that level, and that participants agree that prices below $6,792 are ‘too cheap’.
Forex
The dollar has had a rough week. While the ceasefire news was a big bullish factor for risk-on assets, risk-off hedges like the dollar suffered.
EUR/USD on the Daily Timeframe
The EUR/USD pair isn’t looking too dissimilar from the S&P; after a break through of a key resistance area (now support), price is hanging out slightly above it. This provides a similar outlook across both assets, provided price closes above the 1.158-1.163 zone, price seems likely to find support at those prices.
This scenario seems to have a slightly better likelihood than the S&P alternative, due to the sheer amount of old highs that have piled up at that area.
Commodities
Despite the ceasefire news, oil prices haven’t seen a sustained downtrend, as market participants are still not convinced in a full-scale reopening of the Strait of Hormuz.
Oil on the Daily Timeframe
Looking at the chart, this seems like a textbook range. A clear zone of support to the underside, and a clear zone of resistance to the upside, with price failing at both ends and neither side being tested more than the other. As far as technicals go, this chart is giving away nothing about where prices want to go. If anything, prices are seemingly likely to stay in $90-120 range for a little while longer.
Conclusion
One-sentence summary of the week:
A Fragile Ceasefire Pushes Stocks Materially Up, but Oil only Slightly Down