Crisis in the middle, Risk in the end.
Through the week, Middle East has been waiting with bated breath for Israel’s response. US officials confirmed Israel has carried out military operations against Iran.
But there has been no word from Israel and Iran - market pessimism & flight-to-safety, visible in “W-shaped” market moves.
Markets continuously adjust to the shifts between geopolitical escalation and relaxation. It’s important to understand that the markets have nowadays become less sensitive to geopolitical events especially in the Middle East. If not for the fact that there is weekend risk to consider, there could be a stronger bounce back in risk.
Lesson for the modern-day investor is very clear - "be aware of geopolitical risks, but not over-obsess". In keeping with the changing times, there is a valid case for semiconductors being the new 'oil of 1970s' - markets would care more about South China Sea than the Middle East.
Data recap: Existing home sales dropped 4.3% in March - widely expected given the slip in mortgage applications. In contrast to the negative April NY Fed, and adding hope that US manufacturing is finally showing signs of bottoming, April Philly bounced to +15.5 from +3.2 (Exp+2.0). Pricing component confirms rising inflation.
Weaker EUR & Higher Oil prices and so a case for resurgence of inflation- that's why Lagarde said “game is not over” with inflation., whereas Villeroy said, bar a major Suprise "we should cut rates at the next meeting." Global shipping routes a heavily impacted from Red Sea to the Gulf of Aden because of ongoing strife and that's possibly a surprise he could not have seen coming. Below 1.0650 implies 1.0450 next week.
Imminent risk of 7.35 break given US yields -a positive news is that Swift confirming that Yuan's share in global payments had hit record 4.69% in Mar as against previous 4 % - mostly on Russia and China accumulating Gold.
Retail Sales stagnant as a decline in food and non-store retailing was offset by spending on fuel and non-food items - no immediate case for rate cuts - Repeated failures in the high 1.24s setting up a Friday drop - Signals target 1.2369, 0.618% Oct-March rise, then the 1.2045 Oct 23 base.
Main USD/JPY driver remains the Fed and Treasury yields and not the Middle East. So, the conflict should not cause any Yen strength - 155.00 remains the key psychological hurdle.
83.45/55 ping-pong in progress.