Modest Hedging Demand to Start Week

MACRO FRAME

A lack of material progress on the US-Iran conflict underscores that global energy prices are likely to remain elevated for the foreseeable future.

STOCK INDEX FUTURES

Equity index futures are mostly lower as energy prices rose overnight, despite the US announcement of “Project Freedom” to free Hormuz-stranded ships. Official Iranian media reported that two US warships were hit by missiles in the Strait of Hormuz, although the attack reports were denied by US officials. US equities will find underlying support on resilient earnings expectations and an assumption that the growth impact due to the Strait closure will be contained. Prediction markets around the Strait of Hormuz point to a drawn‑out resolution, suggesting that elevated energy prices may remain a feature rather than a bug through mid‑year. The prevailing narrative is that sustained but not runaway energy prices will keep inflation elevated at the margin, complicating the path for policy but stopping short of derailing US growth. As long as the conflict is viewed as finite and largely contained, markets appear willing to look through near‑term volatility and lean on earnings strength to justify higher equity prices. Still, geopolitical risk remains a clear downside catalyst for risk assets, with the oil complex likely to dictate the direction. The VIX is trading at 17.81, up 0.82 points (+4.83%) from Friday’s close of 16.99, reflecting rising hedging demand to start the week amid Mideast headlines and firmer crude/yields. A reading in the 15–20 zone remains moderate rather than alarmed, but the directional bid for volatility argues for a cautious, mildly defensive posture into the open.

The June S&P is trading at 7,252.00, down 0.08% from Friday’s settlement of 7,258.00, within an overnight range of 7,213.75 to 7,279.75. Near-term support is seen at 7,213.75 (overnight low), with initial resistance at 7,279.75 (overnight high) and the round 7,300 level above. The S&P 500 cash index ($SPX) closed Friday at 7,230.12, holding well above its 50-day SMA of 6,815.38 (+6.08%) and its 200-day SMA of 6,729.87 (+7.44%).

The June Nasdaq is at 27,857.50, up 0.08% from Friday’s settlement of 27,835.75, within an overnight range of 27,662.25 to 27,965.75. Initial support is at 27,662.25 (overnight low), with resistance at 27,965.75 and the 28,000 round number above. The Nasdaq 100 cash ($IUXX) closed Friday at 27,710.36, sitting +10.05% above its 50-day SMA (25,179.03) and +11.63% above its 200-day SMA (24,823.74) — the most extended of the three indexes.

The June Dow is the laggard at 49,508, down 0.28% from Friday’s settle of 49,646, within an overnight range of 49,225 to 49,805. Support sits at 49,225 (overnight low), with resistance at 49,805 and the 50,000 round number above. The DJIA cash ($DOWI) closed Friday at 49,499.27, holding +3.43% above its 50-day SMA (47,860.07) and +4.85% above its 200-day SMA (47,208.17).

Watch point: Equities remain sensitive to upside moved in crude. However, a solid earnings backdrop remains friendly to prices as long as investors feel US equities are absent from the economic impact of the conflict.

CURRENCY FUTURES

US DOLLAR: The USD index is 0.28% higher at 98.43, supported by the overnight move higher in energy prices. Ongoing geopolitical tensions and higher oil prices continue to offer the dollar support through safe-haven flows. Underlying fundamentals make the case for a resumption of the dollar’s downward trend once hostilities between the US and Iran are over. Despite rising inflationary pressures and modestly tighter Fed policy expectations, the dollar has lost its interest rate differential support compared to major peers.

Watch point: Higher oil prices and an escalation between the US and Iran will offer the dollar safe haven support. However, underlying macroeconomic fundamentals make the case for a resumption of the dollar’s downtrend when hostilities are over.

EURO: The euro is 0.11% lower at $1.1707. Over the weekend, President Trump announced the US would be increasing tariffs on cars and trucks from the EU to 25%. While the development is certainly not euro-positive, it is not the driver of price movements; the situation in the Middle East remains the dominant factor in price direction for the currency.

The European Central Bank is likely to hike rates in June in response to a fresh inflation overshoot. Headline inflation has jumped to 3% on the back of Iran‑related energy shocks, pushing price growth further above target even as euro area activity and business sentiment soften, a mix that leaves the ECB focused on credibility and inflation expectations rather than near‑term growth. With officials openly framing June as the point for “policy action” and market pricing already embedding at least two hikes, rate differentials should offer some medium‑term support for the euro even if any ECB cycle is expected to be more measured than 2022. The euro is likely to continue trading opposite of big moves in oil prices. Positive developments out of the US-Iran conflict will be supportive of the currency, while safe-haven demand would see flows to the dollar.

BRITISH POUND: Sterling is 0.12% lower at $1.3555. British markets are closed for holiday today, marking thinner liquidity conditions for the pound. The Bank of England kept Bank Rate at 3.75% but replaced its usual forecast with three Iran‑war scenarios, ranging from a benign path that needs only a “less restrictive” stance to a severe case that would demand “forceful” tightening as inflation could peak around 6.2% and remain above target for years. Governor Bailey stressed that policy over coming months will be a “difficult judgement call,” with markets now pricing a smaller 2026 hiking cycle and officials viewing Scenario B, where inflation rises to a little over 3.5% before gradually returning towards 2%, as the most likely outcome.

However, downside risks to growth and the labor market would appear to be of greater concern to policymakers. Against this backdrop, we expect Bank Rate to remain on hold through 2026, with some scope for cuts later in the year if the Strait of Hormuz reopens and energy prices retreat, limiting upside inflation risks and easing pressure on the pound.

JAPANESE YEN: The yen is little changed overnight at 157.12 yen per dollar despite a sharp jolt in prices overnight that has sparked speculation that Japanese authorities intervened in the currency market once again. Monday morning’s move saw the yen move from around 157.2 per dollar to just below 156 before quickly unwinding, leaving it near 157. The sharp reaction underscores that despite official support, downward pressure on the currency is likely to persist amid the ongoing Middle East conflict. Still, traders are taking the move as a warning shot from officials about keeping markets alert over moves in the currency.

While government intervention provides the yen with some short-term support, especially as it highlights to 160 level as a pain threshold for the government, intervention without firm central bank policy support will likely not be enough to keep the currency propped up. Geopolitical factors and the resulting sustained rise in energy prices are likely to create a challenging environment for the yen. Elevated inflation pressures underscore expectations that the Bank of Japan will need to raise rates in the near-term, with money markets pricing a 55% chance of a rate hike at the June meeting and a 65% chance of a hike at the July meeting.

Watch point: Geopolitical factors/oil prices remain the main obstacle to appreciation against the dollar, even despite policymakers commitment to raise rates.

AUSTRALIAN DOLLAR: The Aussie is 0.24% lower to $0.7197. The Reserve Bank of Australia is expected to raise rates on Tuesday to 4.1%. Markets are pricing an 85% chance of a hike. A further move to 4.60% is fully priced for September. The main downside risk for the Aussie, apart from the geopolitical bid, would be a split vote at the RBA, which would temper market expectations over future policy tightening.  Australia’s key trimmed-mean measure of core inflation, rose 0.8% in the first quarter, slightly below market expectations of 0.9% or higher. The annual pace still nudged up to 3.5%, and further away from the Reserve Bank of Australia’s target band of 2%-3%, while consumer price inflation for March accelerated to 4.6%.

Watch point: While a durable ceasefire would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to keep the RBA on a tightening path.

TREASURY FUTURES

Yields are little changed across the curve in quiet trade ahead of today’s ISM data as markets continue to digest the Fed hold and yesterday’s GDP/PCE double-header. Current levels: 3M 3.672% (−0.3 bps), 2Y 3.886% (flat), 5Y 4.021% (−0.2 bps), 10Y 4.384% (−0.6 bps), 30Y 4.977% (−0.9 bps). The 2/10 spread stands at 49.40 bps (essentially flat from 51 bps prior session), the 5/30 spread is at 96 bps (flat from 96 bps), and the 3M/10Y spread is at 71 bps (uninverted, flat from 72 bps). The move reflects mild bull flattening, long end rallying faster than the front, consistent with consolidation of yesterday’s bull-steepening reaction to the soft 2.0% Q1 GDP advance and in-line +0.3% core PCE / +3.2% YoY. The 3M/10Y remains near cycle-wide at 71 bps, keeping near-term recession pricing subdued; the day’s directional driver is now squarely in ISM’s hands.

While only one member voted against the rate decision, three members voted to remove the easing bias language in the monetary policy statement, a signal that there is growing worry on the board over the rise in inflation and a potential hurdle to future policy-easing this year. Yields are approaching their local highs reached in late March and alongside a hawkish change in Fed rate expectations, market participants are signaling they are expecting inflation to stay elevated in the near term and prevent any sort of downward policy-action from the Fed as evident in one- and two-year inflation swaps.

However, longer-term inflation expectations have only shown a mild increase. TIPS markets show the 5-year breakeven at 2.67%, the 10-year breakeven at 2.46%, and the 5y5y forward rate at 2.25%. The spread between the 5-year and 10-year breakevens of +21 bps (5Y above 10Y) confirms that markets continue to view the inflation rise as front-loaded and consistent with the 11.6% energy-goods spike that drove yesterday’s hot headline PCE, rather than broadening into longer-horizon expectations. With the 5y5y forward stable at 2.25%, well below the 2.5% de-anchoring threshold and actually slightly off its mid-week peak, the Fed retains optionality to treat the near-term CPI/PCE acceleration as transitory, underscoring the FOMC’s hawkish hold while not forcing a more aggressive pivot.

Watch point: Fed policy is poised to stand pat for the time-being, though a path to loosening remains open. Well-anchored inflation expectations should offer resistance to higher yields, while also supporting the case for Fed easing later in the year.

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