The start of the New York session was greeted with weakness and stocks extended their declines after consumer confidence fell to the lowest levels since September 2017 and new home sales declined for a second consecutive month. Both the Dow Jones Industrial Average and S&P 500 index are down 0.4% in early trade. Markets are now awaiting the latest comments from Fed’s Powell this afternoon.
Over night, the focus was on President Trump’s additional sanctions on Ayatollah Ali Khamenei and eight senior military commanders, it was hardly an olive branch to restart negotiations on a new nuclear deal. The Trump administration’s willingness to have talks was met with a ‘hard no’ from foreign ministry spokesman Abbas Mousavi. The Semi-official Iranian Students News Agency reported that Mousavi noted that the diplomatic path with Washington is closed forever.
Iran has already been crippled by US sanctions and the fresh ones will likely have little impact to the economy. It seems difficult to imagine a scenario in the immediate future for tensions to ease in the Middle East. Treasury futures rallied, while both Asian and European equities sold off. Safe-haven flows supported the yen and the kiwi outperformed their major trading partners ahead of their rate decision. The RBNZ is in the middle of an easing cycle and today’s gains are supported on positioning and expectations that we will see the bank hold off on another rate cut until the August 7th meeting.
Trump’s latest sanctions on Iran’s supreme leader appears to be another move to gain bargaining chips in what may eventually become a return to the negotiating table. Middle East tensions have been on high alert since Trump abandoned the landmark 2015 Iran nuclear deal. The US has sanctioned more than 80% of the Iranian economy and if the US wants a regime change, that will require a military conflict. The likely scenario is that Trump will want a renegotiated deal to claim credit that he secured a better deal than his predecessor. Markets would be sharply lower if war was becoming the more likely scenario.
Today’s risk off tone is also being supported by optimism that is heading into the G20 summit at the end of the week. Markets are becoming more hopeful now that something not terrible will happen and we could see a full punting of tariffs. The base case could likely become that a deal could be outlined by the fall, as the incentives are high right now for both sides.