Revised Peace Proposal

MACRO FRAME

Global bond yields remain elevated as markets eye the US response to Iran’s revised peace proposal amid the deadlock in negotiations. While tech/AI leadership may continue to provide a floor, the combination of firmer energy-driven inflation, heightened Fed tightening expectations, and rising geopolitical risk leaves risk sentiment vulnerable heading into retail earnings reports this week.

STOCK INDEX FUTURES

Equity index futures moved lower overnight as elevated Treasury yields and Fed rate hike expectations continue to weigh on sentiment. Crude oil pushed near $109/barrel overnight and with the Iran conflict having gone on for 80 days now, the next round of monthly inflation reports are expected to run even hotter given energy’s trajectory. The 30-year Treasury yield broke above its pre-2008 highs raising possibility of a meaningful rotation from stocks to bonds for the first time this cycle. Bearish positioning data confirms this dynamic has partly materialized with S&P traders flipping to a net short of 31,905 contracts (adding 23,990 to their short), Nasdaq traders also flipped to a net short of 11,042 contracts after net selling 18,730. In the near-term, the challenge for the equities remains elevated yields, expectations of policy tightening from the Fed, high oil prices, and rising geopolitical anxiety around Iran. Meanwhile, as earnings season wraps up, so does the tailwind effect it had on equities. Still, Nvidia’s quarterly results on Wednesday will be under the microscope and is likely to be a catalyst for market direction and tech-enthusiasm. Elsewhere, Walmart, Home Depot, and Target earnings this week will provide insights on how consumers are holding up amid high gas and oil prices. Strong tech sentiment, mainly related to the AI space continues to underpin broader index performance, though this week’s consumer-facing earnings card is likely to act a disruptor toward broader sentiment.

Watch point: The lack of an outcome at the US-China visit has turned sentiment bearish and lead to a wave of profit-taking. Additionally, markets now fear a resumption of strikes against Iran and are beginning to price in the possibility of a rate hike from the Fed.

CURRENCY FUTURES

US DOLLAR: The USD index is 0.15% lower to 99.12, dropping after it was reported that Pakistan had received a revised peace proposal from Iran to which it shared with the US. The bias for the dollar remains higher as the safe-haven rally, inflationary backdrop, and growing expectations that the Fed may need to hike rates are all dollar-positive. Meanwhile, the at-large geopolitical picture remains supportive with President Trump reportedly weighing another round of strikes against Tehran and as Russia reportedly struck a Chinese trade vessel in Ukrainian waters. Today’s notable event will be the US response to Iran’s revised peace proposal and TIC flow data.

Odds of a December rate hike continue to hover around 47%. While recent labor data did reveal some notable spots of weakness, the overall market narrative is that the Fed will keep a hold on rates while a growing chorus of participants are beginning to expected a move upwards. Given such dynamics, the dollar is likely to find solid underlying support amid the continuation of the deadlock in US-Iran negotiations, while a resumption of strikes would further support for the greenback.

Watch point: Stalled optimism around a US–Iran resolution will continue to offer safe-haven support for the dollar. Fed policy expectations are likely to reinforce near-term dollar strength.

EURO: The euro is 0.20% higher to $1.1649, finding some support on a weaker dollar. Dollar strength remains the prevailing theme in currency markets with oil prices higher and jitters over geopolitics. For the euro, the prospect of slower economic growth and higher interest rates as a result of the US-Iran conflict reinforce downward pressure on the currency as the eurozone remains particularly vulnerable to the energy crisis. Eurozone growth slowed to 0.1% in Q1 2026, while inflation rose to 3% in April, the highest since September 2023. S&P Global PMI survey out later in the week will give investors another chance to reassess further monetary policy expectations. Markets are currently pricing a 83% chance of a hike at the June meeting and are nearly priced for two additional rate hikes by year-end.

BRITISH POUND: Sterling rose 0.50% to $1.3386, though remained near April lows as the political and inflationary landscape remains at the front of mind for market participants. Gilt yields surged to multi-year highs last week, over elevated oil prices and worries that a potential successor to Starmer might be inclined to expand fiscal spending and increase debt issuance. For the pound, an unfavorable domestic picture with slow growth and elevated inflation create a challenging environment amid the political crisis for the Labour party. For now, Starmer has refused to resign, leading speculation over what a replacement would look like to pressure the currency. The Sterling is likely to remain under pressure as long as political uncertainty persists. The concern for gilts and the pound is mostly surrounding potential candidate Andy Burnham. The pound is likely to remain under pressure until he clarifies his fiscal position in a more market-friendly fashion.

As for the Bank of England, money markets are pricing a 39% chance of a hike at its June meeting. However, weakness in the UK economy, is expected to act as a limiting factor to overall tightening from the BoE. While recent GDP data showed the strongest quarterly growth in a year for the UK, the impact of higher energy prices on the economy is expected to challenge further growth. The Bank of England will likely view the stronger-than-expected growth as reinforcing a cautious, gradual approach to any further rate moves.

JAPANESE YEN: The yen is little changed at 158.80 yen per dollar. Markets are pricing a 67% chance of a hike from the Bank of Japan come June. Recent wholesale inflation data has bolstered the case for the BoJ to tighten policy. Meanwhile, a Reuters report revealed the government is likely to issue fresh debt to cushion the impact of the US-Iran conflict, a move that is expected to pressure JGBs lower. The 10-Year JGB yield rose to 2.8% on the news, its highest level since 1996. While the size of the additional spending is unclear, the decision has cast doubt on the markets perception of the administration’s fiscal policy, which could pressure the yen further.

AUSTRALIAN DOLLAR: The Aussie is up nearly 0.50% to $0.7180. The resilience in the Aussie despite unresolved US-Iran tensions, suggests markets view the energy shock as more inflationary rather than recessionary. These expectations should favor interest rate differentials which currently favor the Aussie. The Reserve Bank of Australia’s cash rate is well above most G10 countries and elevated inflation pressures, were present before the outbreak of conflict in Iran. Markets still imply around a 20% chance of a June hike to the 4.35% cash rate, but the probability of an August hike to 4.60% slipped to 62%.

Watch point: While a durable end to the war 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 edged lower across the curve as bond markets remain under significant pressure with the two-year remaining above 4% and the 10-year above 4.57%. Rising yields are a common theme across the global marketplace with UK long-dated gilt yields at their highest since 1998, while JGBs hit their highest level since 1996. The bearish conviction is anchored by the largest net speculative/fund short in bonds (698,469contracts) since December 2023. Markets are beginning to price in meaningfully higher inflation; in the US, one-and two-year inflation swaps have both risen sharply in recent days, while Fed rate hike expectations have also increased. Today’s market events to watch: 3- and 6-month Treasury auctions at 10:30 AM CDT, and Long-Term TIC flows for March this afternoon.

Even if fuel prices are ignored, the median and the trimmed mean inflation components are rising. Sticky prices have ticked back up above 3%, while the Fed’s supercore (services inflation minus shelter) broke above 3%. The readings indicate that there is more to inflation than the first-order effects from the oil shock and reinforce expectations that Fed policy is poised to stand still for some time.

Watch point: Fed policy is poised to stand pat for the time-being. The path to loosening has faded materially as inflation has evidently become more broad based.

Interested in more futures markets?  Explore our Market Dashboards here.