Tuesday Focus: Trump decides

The market waits not quite on tenterhooks for Trump to decide whether to end the nuclear deal with Iran

  • Decision Day for President Donald Trump and the Iran Nuclear deal, saw oil prices pulling back further from 3½-year highs as signs that the U.S. may consent to a ‘fudge’ proposal that’s been the subject of furious diplomatic activity for weeks. The arrangement would see the United States largely withdraw from the agreement when sanctions “waivers” expire on 12th May, but effectively permit allies to continue purchasing Iranian oil. Anonymous diplomatic sources expect such a pull-out amid further reports that they made headway addressing the President's concerns on inspection of suspect nuclear facilities and "sunset" clauses of the 2015 deal. The uncertain situation should keep oil elevated above $70 a barrel until at least 1800 GMT, when Trump said he would announce his decision. There's no guarantee of such news at that time, but it's notable crude oil prices had already began to falter after their new cycle peaks, signifying that traders have already priced potential supply risk finely. Changes in the deal that don’t throw the baby out with the bathwater should only tilt oil prices lower in the immediate term. If Trump goes for the 'nuclear option' after all, a fresh 3 1/2-year highs would be on the cards.
  • The threat that oil prices could establish themselves above $72bbl, or even $75bbl has pared back recharged risk appetite after a fairly benign set of U.S. jobs data on Friday. So far investors are shrugging off the possible cost impact of higher oil, allowing U.S. stock markets to post another positive session on Monday. Hesitancy in index futures on Tuesday morning could just as easily be linked to the dollar. The greenback has only partially acknowledged Friday’s soft data. It was as high as 109.11 overnight per yen, and kept the euro on the $1.19 handle after the rate dipped below it for the first time this year on Monday.  Weak German Industrial orders news trumped strong output (from March) so the readings offered little respite for the euro. The Dollar Index was less than 20 basis points off peaks since late December; an announcement that U.S.-China trade talks would resume in Washington next week might have helped. Signs are that markets remain sceptical of any substantive rapprochement, though participants are shrewd enough to take the upside when seemingly distant prospects offer it.
  • Meanwhile Chinese trade data rebounded, removing some evidence of a pause in global growth. However artifacts, like exporters attempting to get ahead of potential tariffs may have flattered export data, even if imports accelerated. Again, the read by returning dollar bulls was positive nonetheless.
  • Europe/U.S. stock market divergence of the last six weeks remained in effect, as Germany’s DAX led French, Italian, and other large markets in the red, though the FTSE 100 outperformed all, referencing both the weak pound and the agreement between Shire and Takeda following the latter’s £45.3bn bid, an improvement on earlier ones, now with more cash. A long lead time before completion means the floor under shares of the British maker of drugs maker could be a porus one for up to a year.
  • Long-mooted consolidation has also arrived among ‘challenger banks’, as CYBG finally pulled the trigger on an offer for Virgin Money after several months of flirting referenced by CEOs of both lenders. The long run-up suggests a smoother path to a deal. Logic, at least, also favours moves amongst rivals like OneSavingsBank and Metro, helping account for the rise of their shares and enabling their FTSE 250 mid-cap index to outpace the benchmark with a 0.7% rise. FirstGroup was a counterweight, sliding 7.5% after private equity interest faded
  • Walt Disney reports earnings after the U.S. market closes, though these will be edged in terms of attention by developments in the Sky takeover saga after Comcast notified the European Commission that it would bid. This would throw into jeopardy a carefully choreographed purchase of the Sky shares not owned by 21st Century Fox, but which Rupert Murdoch’s vehicle has long coveted. Fox, which is selling broadcast and film assets to Disney has so far made a lower offer than Comcast’s informal £22bn deal. Potential scrutiny by European competition regulators, continued oversight by Murdoch-wary UK authorities, and uncertainty as to whether Fox would raise its own bid added weight to Sky shares, as has increasing chances that Disney’s attitude to Sky will become even more neutral.
  • Macroeconomic highpoints for the week are some 36 hours away, when U.S. and China inflation releases will pique investor  interest. A dump of industrial and factory data on Thursday may provide further justification for the Bank of England’s likely decision to not raise rates on the same day. The Bank now has the added conundrum of having to prepare guidance adequately again for the rise that it initially signalled would happen this month. Market rates now only price a 50/50 chance of a hike by August. This trains attention on the BoE’s economic forecast updates on Thursday. They may only fall marginally despite recent soft data, to keep the chance of a hike this year alive.

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