Week of 11 MAY

Markets were in a bit of a holding pattern, awaiting news from a potential deal to end the war in Iran and US NFP data. Risk sentiment was divided, with US markets hitting new record highs while European indices were more cautious. Brent dipped below $100 midweek amid optimism over peace talks, but returned to triple digits by the end of the week. Gold prices fell below $4,550 at the start of the week amid a hawkish Fed, but climbed back above $4,700 as energy prices fell.

The week ahead offers a modicum of economic data that could drive markets, including US inflation data and UK monthly GDP figures.

Week in Review

The week's open was marred by holidays and by a focus on the Strait of Hormuz after US President Donald Trump announced over the weekend a plan to move ships out of the Persian Gulf. European markets played catch-up, while China and Japan were closed for a holiday, allowing gold to dip to $4,600 on Monday. Crude prices were broadly unchanged over the weekend, with crude opening at $107 per barrel and WTI at $101. The ship-moving plan was suspended after just one day amid reports that the warring sides were close to an agreement to fully reopen the Strait. Markets generally cheered, and Brent fell below $100 later in the week. However, the optimism proved to be premature as no deal emerged, and late Thursday, the US launched retaliatory strikes into Iran. Trump said that the ceasefire was still in place and was waiting for an Iranian response to a 14-point peace proposal. Brent returned to just above $100 on Friday.

The RBA delivered the expected rate hike on Tuesday, but also raised its inflation outlook and warned more rate increases were possible, in a more hawkish message than the market anticipated. Futures are now pricing in two rate hikes in the summer after a pause at the next meeting. Australia's trade balance fell into a deficit for the first time in 9 years amid rising import costs from higher fuel prices and a drop in exports.

The US Treasury kept its refunding rate unchanged from the prior quarter, as widely anticipated, and confirmed it would not change auction sizes over the next several quarters. After the announcement, US Treasury yields fell, weighing on the dollar and supporting gold.

In geopolitics, aside from the situation in the Middle East, UK PM Keir Starmer came under renewed pressure to resign following the results of local elections in which Reform is anticipated to be the biggest winner.

Biggest Market Movers

• The yen gained midweek after the pair touched the 160 handle, then fell to 157 as investors speculated on another round of BOJ intervention.
• The NZD was the best-performing major currency after RBNZ Governor Anna Bremen warned of higher inflation, and the unemployment rate came in lower than anticipated.
• The CAD was the worst-performing major currency, dragged down by lower crude prices and commentary from BOC Governor Tiff Macklem, who said the BOC was looking through the first-round effects of higher energy prices.
• The Nasdaq notched a record high mid-week following strong earnings from AMD, capping a quarter of outperformance among tech stocks.
• The Nikkei 225 was once again one of the best-performing global indices, jumping 5.5% on Thursday, its best-ever performance, but playing catch-up after being closed for the first three days of the week.

Top Events in the Week Ahead

Geopolitics is likely to be the focus again for markets in the coming week, with a potential deal with Iran and Trump's meeting with China's President Xi Jinping on the docket. However, Trump is apparently travelling with a small delegation to China, which is being interpreted as a sign that there won't be much major progress between the two countries. In terms of data, the main focus will likely be on US inflation numbers as markets try to determine whether the Fed will cut or hike rates later this year. UK GDP data might be the focus unless the dismal results in the recent election cause a leadership race in the UK next week. Here are the key events that might move the market in the coming days:

US Inflation Seeing Upward Pressure

April US CPI comes out on Tuesday, with the headline number expected to rise to 3.6% from 3.3% prior amid higher energy prices. The core rate, however, is expected to remain at 2.6%, which could provide an opportunity to look past the energy crisis if oil prices fall soon. The US core PPI comes out a day later and is expected to continue to show upward pressure at 3.9%, compared to 3.8% in March. Also on Thursday are April retail sales, which accelerated in March amid uncertainty over the war. April US retail sales are expected to drop back to 0.1% growth from 1.7% in the previous month. With gold recovering, a break of $4800 might open the door to the $K handle, while losing $4500 exposes $4400.

UK GDP Accelerating

The British economy is expected to show growth on Thursday, with preliminary Q1 GDP accelerating to an annual 1.4% from 1.0% in the fourth quarter of last year. That is based on March GDPI staying strong at 0.3% after growing 0.5% in February. However, this could all be moot if Starmer is forced to resign and the market grows nervous about a new PM replacing Chancellor Rachel Reeves with a less market-friendly Minister. Stuck between 1.35 and 1.37, the pound might see a breakout.

China Stimulus Back In Focus For Commodity Currencies

After China's trade balance over the weekend, commodity currencies will be looking for signs that the world's second-largest economy continues to buy raw materials despite higher energy prices. Low inflation has left plenty of room for the central government to support domestic market growth, but April PPI is expected to accelerate to 1.7% from 0.5% in March. This could put some pressure on the Aussie in particular after its trade balance turned negative last week. However, it still trades above 0.72, with lower support at 0.7140 and resistance at 0.73.

Other Events and Earnings

Monday has the US existing home sales data. Tuesday includes Australia's Westpac consumer confidence index and NAB business confidence survey. Australia's wage index comes out on Wednesday. For Thursday, China's new loans are expected. Friday sees German wholesale price data.

Earnings season is in the back half of this week, with notable names reporting, including Barrick, JD.com, Alibaba, Cisco, Applied Materials, Imperial Brands, and Burberry.