Market Response After Iranian Strike

Risk Appetite Shifts

Risk appetite has improved since last Friday, prior to Iran’s retaliation against Israel. Iran’s strike involved over 300 drones and missiles, with minimal impact as most did not reach their targets and only minor damage was reported at an army base.

With no casualties and Iran deeming the attack a success, promising no further action unless provoked, markets reacted mildly. Oil prices dropped slightly, while gold saw a jump at market open due to lingering tensions from the previous week.

Metal Prices Surge

Following sanctions imposed by the US and the UK on Russian supplies, prices for base metals like copper, iron, and aluminum soared. Spot aluminum prices increased by over 5%, and copper futures hit their highest levels since the previous summer.

US Dollar and Fed Rate Expectations

The US dollar has strengthened significantly due to reduced expectations for Federal Reserve rate cuts, fueled by strong job and inflation data. Current projections show a low likelihood of a rate cut in June, a 50-50 chance in July, and a higher probability in September.

However, the narrative around the upcoming presidential election suggests that the first rate cut might not occur until after November, with some speculating the next Fed move could be a rate hike to address inflation.

ECB and Fed Policy Divergence

Contrasting fortunes between the US and Europe are evident. The European Central Bank hinted at possible rate cuts in June, diverging from the Fed’s strategy. This difference is driven by strong US economic data and supportive government policies, such as a proposed $7.4 billion student debt cancellation by President Biden.

As a result, the gap in rate cut expectations between the ECB and the Fed has widened, prompting discussions of a further decline in the euro towards parity with the US dollar.

Earnings Outlook

The S&P 500 experienced its worst weekly performance since late October 2023. Mixed bank earnings contributed to the downturn, with significant losses in JPMorgan Chase due to disappointing net interest income and a decline in non-interest-bearing deposits at Wells Fargo.

The upcoming week promises more earnings announcements from major US banks, Netflix, and TSM, with a projected 3.8% annual growth in EPS for S&P 500 companies and a potential 38% increase for the top seven firms. The earnings results could either mitigate or intensify selling pressures in the market.

Cryptocurrency Trends

Bitcoin’s value dropped over the weekend amid rising geopolitical tensions. The upcoming Bitcoin halving, which reduces the supply of new coins, typically supports higher valuations, although the market may have already priced in most of the expected impact.