Opening Bell: Oil Higher; Yields Ease; U.S. Stocks Rally Post Iran Decision

Key Events

This morning, European indices ended what could have been a perfect 24 hours for global markets as they edged lower, spoiling the upbeat performance posted by their Asian counterparts on the back of a surprisingly bullish US session. Investors faced two primary risk factors during the global trading session:

1. Italy's former Prime Minister Silvio Berlusconi cleared the path for the populist 5Star Movement and far right Lega parties to form a coalition government. Should this occur it would boost the eurosceptic movement across the continent and ratify the anti-establishment shift seen in the US with Donald Trump's presidential victory. The move also reignites fears over EU political stability, which has come under pressure following the Brexit vote in June 2016.
2. Middle East tensions escalated following Trump's withdrawal Tuesday from the the Iran nuclear deal, with Israel retaliating against Iranian forces in Syria on Thursday after Iranian missiles fired at Israel's Golan Heights.

The STOXX Europe 600 traded lower, pulled down mostly by utility companies. US futures for the S&P 500, the Dow and the NASDAQ 100 on the other hand, look unfazed by widespread uncertainty. They're all heading higher ahead of the upcoming US consumer prices release later today.

On Thursday morning, most Asian stock benchmarks advanced, with China's Shanghai Composite, Hong Kong's Hang Seng, Japan's TOPIX and Nikkei 225 and Australia's S&P/ASX 200 all posting gains.

However, shares on the TOPIX fluctuated intra-session, posting an obvious negative correlation to the yen, thereby once again underscoring how sensitive Japanese shares are to the whims of speculators who trade the yen, ever since it managed to replace the Swissy as the world's most popular safe haven currency in the last few years.

Global Financial Affairs

The upbeat Asian session followed the unexpectedly resilient performance posted by US equities in the aftermath of Trump's exit from the Iran deal. Oil's continued rally, past the $71 a barrel level for the first time since 2014, was instead more predictable. WTI prices are extending that rally today, nearing $72 and trading at yesterday's highs.

Yields on 10-year Treasurys retreated, closing half basis point below the crucial 3 percent mark after yesterday reaching an intraday high of 3.014 percent. The benchmark note has continued to ease further on Thursday. US stocks seem to have taken the 3 percent breach in Treasury yields in stride as well.

Elsewhere, former Malaysian Prime Minister Mahathir Mohamad overwhelming won yesterdays election, reclaiming his former position as well as ending the six-decade rule of Prime Minister Najib Razak's party in a landmark shift for the South East Asian nation. Malaysian markets are expected to be closed Thursday and Friday after the government declared public holidays.

The shocking result sent the iShares MSCI Malaysia ETF (NYSE:EWM) to its biggest slump in almost 2 1/2 years. Malaysia's 2045 bonds plunged, to a low last seen in 2016.

Yesterday, Wall Street indices rallied vigorously. The S&P 500 climbed 0.97 percent, with only defensive sector Utilities (-0.7 percent) in the red. Naturally, Energy outperformed (2.04 percent) on the outlook of 1 million barrels a day removed from the oil market after the US reinstated sanctions against Iran.

Financials came in second (+1.48 percent), benefiting from the 10-year Treasury yield crossing the 3.00 percent mark once again intraday. Rising yields drove the dollar index higher for a fourth straight day on the outlook of higher interest rates. Those would increase profits for banks, boosting their share values.

The Dow Jones Industrial Average added 182.33 points or 0.8 percent, with 23 of the 30 biggest US companies ending the day in the green. The NASDAQ Composite gained 73 points or 1 percent.

We forecast that a US withdrawal from the Iran deal would boost oil prices as well as the dollar, while sending equities lower. As such, yesterday's equity bullishness was clearly shocking.

Not only did the risk of an imminent war in the Middle East became more tangible, but US yields returned above 3 percent: remember, rising yields—even long before they reached that key psychological level—are what sent the stock market into its first double-digit correction since February 2016.

While the combination of low unemployment and muted wage growth may be seen as favorable for economic growth in a Goldilocks Economy, record yields pave the way for a spike in interest rates, which no one would see as positive for markets.

Therefore, we consider this short-term bullish movement the prelude to a mid-term, if not longer-term, bearish move. While we reiterate that equity investors have been tuning out geopolitical headwinds since the 2016 Brexit vote, the fact that they're also disregarding the accelerated risk of a spike in rates—after being bearish about that very same event—leads us to see the current trend as driven by greed, and expect the S&P 500 push will be thwarted as it approaches the top of the triangle.

Of course, should the top of the triangle be breached, we would be forced to reconsider our bearishness.

Meanwhile, we would argue that 10-year yields completed a bullish Falling Flag, eyeing the 3.16 percent level.

Earlier today the New Zealand dollar plunged after the central bank left the door open to an interest rate cut as inflation remains contained. Australia’s 10-year bond yield dropped to its lowest level against the greenback since the 1980s.

Up Ahead

• The Bank of England decides on policy today.

• The US inflation report for April is also due.

• NVIDIA (NASDAQ:NVDA) reports Q1 2018 earnings after the US close today. Expectation are for $1.46 EPS on $2.89B in Revenue. Analysts are anticipating another blowout quarter for the US chipmaker.
• Canadian employment numbers will be released on Friday

Market Moves

Stocks

• The STOXX Europe 600 fell 0.1 percent, the first retreat in a week.

• Futures on the S&P 500 gained 0.1 percent, reaching the highest level in more than three weeks on its sixth consecutive advance.

• The MSCI All-Country World Index climbed 0.1 percent to the highest in three weeks.

• The UK’s FTSE 100 gained 0.1 percent to the highest level in more than 14 weeks.

• Germany’s DAX advanced 0.2 percent to the highest level in 14 weeks.

• The MSCI Emerging Market Index jumped 0.7 percent to the highest level in more than a week on the biggest increase in more than a week.

• The MSCI Asia Pacific Index climbed 0.4 percent to the highest level in more than a week on the largest climb in more than a week.

Currencies

• The Dollar Index slid 0.1percent, the first retreat in a week.

• The euro gained 0.1 percent to $1.186, the first advance in a week.

• The British pound advanced less than 0.05 percent to $1.355.

• The Japanese yen fell 0.2 percent to 109.94 per dollar, the weakest level in almost 14 weeks.

Bonds

• The yield on 10-year Treasuries decreased two basis points to 2.98 percent, the biggest tumble in almost two weeks.

• Germany’s 10-year yield decreased one basis point to 0.55 percent.

• Britain’s 10-year yield declined one basis point to 1.457 percent, the biggest fall in a week

Commodities

• WTI crude gained 0.7 percent to $71.61 a barrel, the highest in more than three years.

• Copper was unchanged at $3.06 a pound, the lowest in more than a week.

• Gold dipped 0.1 percent to $1,311.51 an ounce, the weakest in more than a week.