Stocks Aside, Markets Are Going Nowhere Fast

Markets are stuck in a rut.

Setting equities aside, where we see record highs printed across the board as participants continue to focus on the ‘light at the end of the tunnel’ regarding a potential end to conflict in the Middle East, there really isn’t a lot going on everywhere else.

In FX, for instance, most G10s have moved sideways for a fortnight or so now, with the DXY stuck in a single big figure range over that period, as JPM’s proprietary gauge of G7 implied vol has slipped to a 3-month low.

The same is seen in the metals space, where gold has sat in a $300 range for most of April, with the yellow metal having little going for it right now, no longer being an effective haven, while also failing to ride on the coattails of the broader risk rally.

Similarly, Govvies are rather stuck, with the benchmark 10-year Treasury yield having trod water in a 10bp range for a while, as inflation expectations remain anchored over the medium-term, and participants – slowly but surely – realise that the idea of policy tightening, particularly stateside, is for the birds.

Of course this begs the question of what happens next, with participants continuing to scrabble around, largely in vain, for a tradeable narrative or theme.

Given that a re-escalation in the Middle East seems a slim probability right now, with neither the US nor the Iranians seeking a return to kinetic action having extended the ceasefire effectively indefinitely, and with punchy public statements aimed simply at generating negotiating leverage, it seems as if the assets in question here are now in a sort of ‘wait and see’ mode in anticipation of a truce, or peace deal, being agreed.

Beyond that, and assuming that the conflict doesn’t re-escalate, attention will likely turn towards the macroeconomic fallout from recent events, and any central bank response to them. In order for participants to turn their attention to that, though, we might actually need to see a deal ‘signed on the dotted line’ first.

In any case, in terms of that fallout, it remains the case that the US economy is in a considerably better position than DM peers to weather the storm, not only with the US much less reliant on energy imports than other DMs, but also considering the robust nature of business investment, and solid personal consumption, ably aided by a continuation of the positive wealth effect.

If indeed we are to return to a world of ‘US exceptionalism’, that would augur well for buying dips in the dollar if they were to emerge, particularly in the event of central banks elsewhere in G10 actually pulling the trigger on rate hikes, which would simply be a policy mistake at this stage, and likely lead to that tightening, and even more, being unwound in very short order indeed.

Elsewhere, gold doesn’t have much going for it at all at present, in either direction. Despite bullion trading akin to a risk asset, in an environment such as the current one, it’s preferable to hold equity exposure in order to take advantage of the more positive geopolitical tone, as opposed to an asset with a lower beta to the same theme.

Similarly, if one were seeking to hedge the risk of a global growth slowdown on the back of higher crude prices, then Govvies are a more attractive option, taking into account the long-end sell-off seen across the board since the start of conflict in the Middle East, and considering that we have hardly retraced much of that move. At the front-end, meanwhile, there is likely also room to rally, as near-term inflation expectations retrace, and policy tightening is priced out.

All of this, though, is likely to require a durable end to the conflict being achieved first. In the meantime, and barring a material deterioration of the situation in the Middle East, current ranges seem likely to persist for the time being.