Three major assets are higher on Friday, all driven by the combination of two factors that caught the market by surprise. Those are the dollar, gold and crude. Tensions between US and Iran are high now amid rumors that US President Donald Trump could order airstrikes as soon as the weekend. But just a few days ago, the price of crude slumped as markets priced out the risk of a war in the Middle East.
Both sides had showed optimism at the start of negotiations on Monday. But, on Wednesday, Iran briefly closed the Strait of Hormuz, and the media focused on the build up of US military assets in the region. On Thursday, Trump said he wanted to resolve the situation within two weeks, seemingly putting in a deadline. That was notable, because the last time he ordered a strike on Iranian nuclear facilties, he also gave a deadline. And the strike happened before the deadline was met to maintain the element of surprise. This has left some analysts wondering if something similar will happen, with a week-end operation seen as likely.
Trump Appointment Less Dovish?
The other surprise got less coverage, which was commentary by FOMC official Stephen Miran. He’s notable because he was appointed by Trump amid the President’s push to lower interest rates, and has consistently been the most dovish member on the panel. Miran’s appointment was initially going to be temporary as he replaced Adriana Kugler for the rest of her term. But recently he was confirmed in his post at the Fed, suggesting he has the support of the White House.
So, his comments that the economy is running hot, and that he saw less reason to cut rates if inflation did not come down came as a surprise to many analysts. Does that mean Trump is giving up on pushing for lower rates amid concerns that rising cost of living is hurting his party’s chances in the upcoming midterms? After the comments, the odds of a June rate cut fell by ten points, as markets are starting to accept that interest rates could stay at this level through the first half of the year.
The Market Reaction to the Moves
Gold prices were initially lower this week, falling below $4,900 per ounce after the US reopened from its Monday holiday. Low demand from the world’s largest buyer, China, amid the Lunar New Year holiday was seen as one of the factors letting gold fall. But the renewed Middle East tensions pushed the price higher despite rising US Treasury yields. With US equities essentially flat since the start of the year, traders are looking for a store of value amid the uncertainty.
The stronger dollar in the last few days suggests that it remains a popular safe haven, despite the general “sell America” trend amid the tariff uncertainty. Miran’s comments also likely helped to reduce concerns about the Fed’s independence. By suggesting he was responding to the data and going against Trump’s wishes for lower rates, it seems that even Trump appointees at the Fed are still data-driven. That could help the dollar regain some of its international standing.
Crude prices are naturally trending higher, with Brent rising above $72 per barrel on Thursday. However, it was already trending lower by Friday and isn’t far off from the price level it was at just a couple of weeks ago. This could mean the market isn’t pricing in the potential for airstrikes on Iran, instead seeing the US build-up in the Middle East as a pressure tactic amid ongoing negotiations.