Earnings, AI Backdrop Supports SIFs

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 higher as market participants looked past the US-Iran conflict following another round of solid earnings reports. Iran’s IRGC launched cruise missiles, drones, and small boats at US warships and commercial vessels in the Strait Monday, with US forces defending all ships and sinking six Iranian boats; President Trump stopped short of describing Iran’s latest attacks as a violation of the cease-fire, suggesting he may be willing to look past missiles being fired at US warships and commercial vessels.

Financial markets are behaving as though the conflict is largely resolved, having surged more than 12% from its late-March trough of roughly 6,585, erasing all losses incurred since hostilities escalated in late February. Volatility, as measured by the VIX, sits at historically subdued levels for an ongoing military conflict. Two additional tailwinds have supported US stocks. First, the AI trade has re-accelerated in recent weeks, providing a powerful domestic earnings narrative that has partially decoupled US indices from geopolitical headline risk. Second, investor conviction is building that Iran’s weakened military position will force a compromise on Hormuz without requiring US ground forces, a scenario the market is treating as a near-base case. As Barclays equity analyst Stefano Pascale noted, “the market is operating under the assumption that we have already witnessed the worst of the conflict”. However, elevated oil prices remain a point of weakness for market, with a rise in energy prices likely to pressure gains in the indices.

The VIX is trading at 17.65, down 0.64 points (−3.50%) from Monday’s close of 18.29, reflecting falling hedging demand as overnight Mideast headlines stabilized and futures bid higher. A reading in the moderate 15–20 zone, sliding lower this morning, argues against a near-term risk-off posture and is consistent with the broad pre-market bid in equities.

The June S&P is trading at 7,259.25, up 0.40% from Monday’s settlement of 7,230.25, within an overnight range of 7,223.75 to 7,263.00. Near-term support is seen at 7,223.75 (overnight low), with initial resistance at 7,263.00 (overnight high) and the 7,300 round number above. The S&P 500 cash ($SPX) closed Monday at 7,200.75, holding above its 50-day SMA of 6,822.64 (+5.31%) and its 200-day SMA of 6,734.39.

The June Nasdaq leads at 27,946.50, up 0.61% from Monday’s settle of 27,776.00, within an overnight range of 27,731.75 to 27,959.00. Initial support is at 27,731.75 (overnight low), with resistance at 27,959.00 and the 28,000 round number just above. The Nasdaq 100 cash ($IUXX) closed Monday at 27,651.82, sitting +10.55% above its 50-day SMA (25,231.81) and well above its 200-day SMA (24,846.61).

The June Dow is at 49,265, up 0.38% from Monday’s settle of 49,079, within an overnight range of 49,060 to 49,278. Support sits at 49,060 (overnight low), with resistance at 49,278 (overnight high) and the 50,000 round number above. The DJIA cash ($DOWI) closed Monday at 48,941.90, holding above its 50-day SMA of 47,846.39 and its 200-day SMA of 47,230.46.

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 0.14% higher at 98.51. The dollar is trading higher despite oil prices moving lower and a rise in the equities, moves counter to recent cross-asset dynamics. The broader currency market is largely trading in a holding pattern, suggesting that traders remain sensitive to news flow, which is likely to contribute to sudden moves in either direction. 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 little changed at $1.1692. It is a thin week on the economic calendar for the eurozone, leaving price direction subject to moves in oil and new flow. President Trump ordered the withdrawal of 5,000 US troops from Germany, hinting at further cuts, and raised tariffs on EU cars and trucks to 25%, accusing the EU of failing to uphold its trade deal with Washington. The developments would otherwise pressure the euro, however, the situation in the Middle East remains the dominant factor in price direction for the currency.

Markets are pricing close to three rate hikes by year-end, though this appears optimistic given that the recent inflationary impulse is largely oil-driven and may prove transitory. Still, the European Central Bank is likely to hike rates in June in response to the 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. Market pricing and rate differentials should offer some near‑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 held steady at $1.3546 ahead of local elections on Thursday, which could see Prime Minister Starmer face renewed pressure. Polls suggest Starmer’s Labour Party will incur heavy losses in the vote, which could trigger a leadership challenge. Any increase in the perceived likelihood of Starmer’s resignation would likely act as a headwind for sterling.

Elsewhere, money markets are pricing a 55% chance of a hike from the Bank of England at its June meeting; markets are nearly priced for three rate hikes this year, similar to the ECB. However, weakness in the UK economy will act as a limiting factor to policy tightening.

JAPANESE YEN: The yen fell 0.55% to 157.77 yen per dollar, though not far off its recent two-month high following two instances of official Japanese intervention in the currency market. 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.

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. Given the current status quo, the yen is likely to consolidate in the 157-159 range.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.7173 following a third-consecutive rate hike from the Reserve Bank of Australia to raise the cash rate to 4.35%. The board hinted that any further rate hike may be on hold saying, “monetary policy is well placed to respond to developments.” The board voted 8 to 1 for the hike, a hawkish shift from March when it split 5-4. Markets imply around a 20% chance of an additional move in June, but are fully priced for another hike to 4.60% by September. However, a reopening of the Strait this month would likely result in the board holding on rates. The main downside risk for the Aussie in the near term remains the geopolitical bid.

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 inched lower across the curve after rising on Monday in response to escalating tensions between the US and Iran. Focus now shifts to upcoming speeches from Fed officials and a slate of key economic releases later in the week, including April’s jobs report, which is projected to show 60,000 job gains in April. Current levels: 3M 3.689% (-0.7 bp from 3.696%), 2Y 3.932% (-3.0 bps from 3.962%), 5Y 4.064% (-2.9 bps from 4.093%), 10Y 4.420% (-2.6 bps from 4.446%), and 30Y 5.004% (-2.1 bps from 5.025%, holding the 5.00% line). The 2/10 spread stands at 48.60 bps (+0.4 bp wider from 48 bps), 5/30 at 94 bps (+1 bp wider), and 3M/10Y at 73 bps (-2 bps tighter but still uninverted). The front leads the rally with the 2Y down 3.0 bps and the 30Y down only 2.1 bps, classic bull steepening, consistent with positioning into 9:00 AM CST ISM Services PMI (Feb peak 56.1, March 53.8) and ahead of tomorrow’s 7:30 AM Quarterly Refunding Announcement.

Inflation compensation continues to grind higher and remains the most hawkish signal in the rate complex. 5Y breakeven 2.72% (+3 bps d/d, +10 bps w/w from 2.62% on 4/27), 10Y breakeven 2.50% (+2 bps d/d, +6 bps w/w from 2.44%), and 5y5y forward 2.28% (+1 bp d/d, +2 bps w/w), both the forward and the 10Y breakeven now sit at the cycle’s local highs. The 5Y/10Y BE inversion of 22 bps confirms a front-loaded inflation profile, with traders pricing the near-term tariff/services-prices impulse (last Friday’s ISM Manufacturing prices subindex at 84.6, a four-year high, reinforces the move) while long-run expectations remain just contained. With the 5y5y forward at 2.28%,  below the 2.50% de-anchoring threshold but pressing higher, the Fed retains optionality to treat near-term CPI acceleration as transitory, but the margin is shrinking.

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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