Oil Surges, 10Y Yield Back Over 3%, Futures Jump In Iran Deal Fallout


For those curious what the fallout from the US withdrawal from the Iranian nuclear deal looks like in the capital markets, the answer is as follows: higher US stock futures, a stronger dollar (at least initially, the greenback has since turned slightly negative) ahead of a $25BN 10Y auction (which may carry the first 3.00% cash coupon in almost 7 years), and perhaps critically, a 10Y Treasury yield rising back above 3.00% again.

But the most closely watched response was how oil would react, and sure enough the bulls have enjoyed the upper hand for now with WTI reversing Tuesday’s “fake CNN news” inspired slump to briefly surpass $71 per barrel, a new 4 year high, while Brent nudged $77 as the market came to terms with a U.S. message that buyers of Iranian crude have six months to curb their purchases.


Oil’s rise has been predicated by fresh concerns what the US withdrawal from the Iran deal means for oil markets: while Trump warned sanctions will be extremely strong for Iran, and any nations collaborating with it, Treasury Secretary Mnuchin said the US will be working with allies on a comprehensive deal, also states that firms can seek waivers or special licenses to operate in Iran, sending conflicting messages. Meanwhile, the Iranian parliament is set to vote on “proportional and reciprocal” action vs. the US after leaving the nuclear pact, while the Iranian deputy oil minister says the nuclear deal can exist without the US.  Meanwhile, UBS estimates that sanctions could lead to the reduction of Iran oil exports by 200-500k BPD over the next 6 months, although both China and India have said they will continue importing Iranian oil.

In global markets, the MSCI Asia Pacific index started off on the wrong foot, dropping 0.3% on weakness in Japan and China, however, sentiment reversed when Europe opened, and the Stoxx Europe 600 Index rose a fourth day as energy companies surged, while US equity futures were trading solidly in the green.


In what may prove to be the most notable development, however, 10-year Treasury yields extends yesterday’s rally to again cross 3% for the first time since late April, ahead of today’s 10Y auction; investors waiting to see if the new bonds will carry a 3% coupon for the first time in almost seven years.


Having erased its 2018 losses earlier this week, the greenback gave up an earlier advance; the biggest losses against the dollar were in the Japanese yen, while Sweden’s krona was the largest gainer. As shown below, the BBDXY initially rose for a fourth day, touching its highest level in more than four months before paring gains, and was unchanged as of 7am ET. 


Still, the next big move in the dollar is likely even higher: “with the dollar unable to fall further and U.S. rates steady in a higher range, pressure on short positions was slowly but surely growing,” said Kit Juckes, a strategist at Societe Generale.

In any case, the ongoing dollar strength continues to complicate the picture for emerging markets as traders digest the U.S.’s decision to walk away from the nuclear deal with Iran. And while the EMs were largely a sea of red again…


… it was a little shallower today, with the TRY the outlier. As discussed earlier, Turkey’s lira reversed losses to surge 1.4% against the dollar on speculation policy makers will take action to support the battered currency; President Erdogan was said to be meeting later on Wednesday with economic officials, including the central bank’s Governor, Murat Cetinkaya. Meanwhile, Indonesia’s rupiah fell to a fresh 29-month low on worries about capital outflows from emerging markets.

Elsewhere, Swedish inflation data released Wednesday supported the possibility of the Riksbank tightening policy later this year and pushed the krona higher. Meanwhile, the euro’s weakness persists, with the currency touching a 4 1/2-month low versus the dollar, while the British pound was weighed down by dismal retail sales data and ongoing political battles within the U.K. on Brexit.

In overnight geopolitical developments, Mexico proposed a 70% regional content requirement for autos in response to US proposal, according to sources. Elsewhere, US Secretary of State Pompeo is expected to return from North Korea with 3 detainees, according to South Korean press reports.

In the commodity sector, aside from the latest burst higher in oil prices, gold prices have continued the slide seen on Tuesday (-0.58%), as the USD held strong on higher treasury yields. Copper currently up 0.4% at USD 6773.50/tonne as Chinese demand remains strong. This demand is not seen in Chinese rebar however, which is currently down for the fourth straight Wednesday, at USD 559.90/t 

Economic data on Wednesday include PPI and wholesale trade sales. Mylan, 21st Century Fox and Booking Holdings are among companies due to release results

Bulletin Headline Summary from RanSquawk

  • WTI breaks USD 71/BBL and Brent over 77/BBL as US pulls out of Iran nuclear accord
  • USD firm above 93.000 as US 10 year yield revisits 3%
  • Looking ahead, highlights include DoEs, Fed’s Bostic, RBNZ and US 10yr Auction

Market Snapshot

  • S&P 500 futures up 0.3% to 2,679.00
  • STOXX Europe 600 up 0.2% to 390.84
  • MXAP down 0.3% to 172.96
  • MXAPJ down 0.03% to 564.77
  • Nikkei down 0.4% to 22,408.88
  • Topix down 0.4% to 1,772.91
  • Hang Seng Index up 0.4% to 30,536.14
  • Shanghai Composite down 0.07% to 3,159.15
  • Sensex up 0.4% to 35,368.63
  • Australia S&P/ASX 200 up 0.3% to 6,108.02
  • Kospi down 0.2% to 2,443.98
  • Gold spot down 0.6% to $1,306.27
  • U.S. Dollar Index up 0.1% to 93.25
  • German 10Y yield rose 2.1 bps to 0.582%
  • Euro down 0.2% to $1.1844
  • Brent Futures up 3% to $77.06/bbl
  • Italian 10Y yield rose 10.5 bps to 1.61%
  • Spanish 10Y yield fell 0.6 bps to 1.314%

Top Overnight News

  • The European Union joined the fight to keep the Iran nuclear deal alive as President Donald Trump’s opponents warned his decision to withdraw the U.S. from the pact could lead America into another war in the Middle East
  • Iranian President Rouhani said his country will continue to work with the other participants — though he warned that it could step up enrichment of uranium if those talks don’t yield tangible results
  • Crude oil held near $70 a barrel after Trump withdrew from the Iranian accord and the U.S. told buyers of Iranian crude they have six months to curb their purchases or face tough penalties
  • A company tied to a Russian oligarch sent $500,000 last year to an entity that Trump’s lawyer, Michael Cohen, used to pay hush money to porn actress Stephanie Clifford, her attorney claimed
  • U.K. PM May suffered multiple defeats over her key Brexit law as legislators ripped up her plans and demanded that she keep the U.K. in the EU’s single market
  • President Trump said the U.S. will withdraw from the 2015 accord to curb Iran’s nuclear program and reinstate financial sanctions on the Islamic Republic
  • U.K. Prime Minister May suffered multiple defeats over her Brexit law as legislators ripped up her plans and demanded she keep the U.K. in the European Union’s single market
  • Argentina asked the IMF for financing to help stem a rout in the peso that is sparking a surge in interest rates and threatening to derail the country’s economic recovery
  • Deutsche Bank is considering a sweeping restructuring in the U.S. that could result in the firm cutting about 20% of staff in the region, according to people briefed on the matter
  • Japanese human-resources and consumer-information provider Recruit Holdings has agreed to buy Glassdoor for $1.2b in cash. Recruit will gain access to the U.S. website’s extensive cache of content

Asia stocks traded mixed after a lacklustre close in the US as markets digested US President Trump’s decision to withdraw from the Iran nuclear agreement which in turn underpinned oil prices. ASX 200 (+0.2%) was kept afloat as energy names coattailed on the upside in oil, although gains were limited by weakness in financials after Australia’s largest lender CBA reported earnings. Elsewhere, Nikkei 225 (-0.4%) failed to benefit from JPY weakness and traded subdued, in which electricity names took a power dive on the higher input costs, while both Shanghai Comp. (+0.1%) and Hang Seng (+0.5%) were initially weaker after a daily net liquidity drain by the PBoC and the verbal spat between US and China envoys at the WTO. However, Chinese markets later recovered with Hong Kong leading the rebound as money market rates eased, in which the 1-month HIBOR declined for a 6th consecutive session. Finally, 10yr JGBs were uneventful despite the cautious risk tone and BoJ’s presence in the market for over JPY 1tln in 1yr-10yr JGBs. This was amid gains in yields which tracked upside in their US counterparts with the US 10yr yield homing in again on the 3.000% level.

Top Asian News

  • Asia High-Yield Bonds Continue Sell-Off in Near ‘Perfect Storm’
  • Foreign Investors Pull Most Cash From Taiwan Stocks Since 2012
  • Emerging-Market Currencies Say Adios to 2018 Gain Amid Iran Risk
  • Fosun International Increases FF Group Stake to 15%
  • Tencent Music Names Five Banks to Arrange U.S. IPO: IFR

Major European bourses are trading mostly higher (Eurstoxx 50 +0.3%), with outperformance in the FTSE MIB . UK’s FTSE 100 (+0.5%) is buoyed by energy names amid higher oil prices post-Trump (Shell +2.4% and BP +2.1%). On the downside, Peugeot (-1.4%), Renault (-1.0%) and Airbus (-1.1%) are at the foot of the CAC 40 on their ties to Iran. Moving onto independent factors, Imperial Brands (+4.7%), Siemens (+4.5%) and Heidelbergcement (+1.4%) are higher following promising earnings while Compass Group (-6.1%) and Prosiebensat (-9.4%) are taking a hit on dissapointing metrics. Burberry (-6.2%) is lagging on the FTSE 100 after Belgian tycoon Albert Frère is to sell his whole GBP 520mln shareholding in the company.

Top European News

  • Burberry Slumps After Billionaire Frere Sells Entire 6.6% Stake
  • Germany’s Tightening Labor Market Might Spell More Trade Trouble
  • Siemens Lifts Profit Outlook on Demand for Factory Software
  • Pound Approaches Four-Month Low as Retail Sales Data Add to Woes
  • Compass Sinks as Earnings Miss, Margins Narrow, Jefferies Says
  • Dialog Semi Gains After Apple Hint Leaves Room for Optimism

In FX, The Dollar’s bull run continues and the index has duly posted another new 2018 peak in the process just above 93.400 and inching closer to the well-flagged next key technical resistance level at 93.522. This comes amidst broad-based Greenback gains, albeit with Turkey’s beleaguered Lira regaining some poise on increased efforts by the CBRT to stem the tide via direct intervention and ahead of a midday (BST) meeting between the PM and Economy Ministry to discuss currency market developments and the overall state of the economy (Usd/Try back below 4.3000 from 4.3700+ at one stage). JPY: The biggest G10 loser as the Buck extends its winning streak, with reaction to US President Trump’s withdrawal from the Iranian nuclear accord and threat of severe sanctions largely confined to crude that has spiked higher, and limited risk-aversion or contagion thus far. Hence, Usd/Jpy as bounced firmly from sub-109.00 lows above 109.50 and towards recent peaks just above 110.00, with the 200 DMA and a key Fib (around 110.19 and 110.24 respectively) also lying in wait beyond the big figure. EUR: Yet more bearish fundamentals (via Italian and French data misses) to compound the positional and Dollar related downside for the single currency below 1.1850, and having relinquished 1.1900 on Tuesday there is little in the way of technical support before 1.1800 aside from a late December 2017 low (1.1812), though the round number may offer some sentimental respite given that a major Fib sits just below (1.1790).

In commodities, oil prices have continued upwards on Wednesday after President Trump confirmed the withdrawal of the US from the Iran nuclear agreement and imposing of sanctions on the nation; WTI and Brent June ’18 futures at USD 71.00 (+2.8%) and USD 76.89 (+2.7%) respectively. Said sanctions could lead to the reduction of oil exports by 200-500k BPD over the next 6 months for the middle-eastern nation, according to UBS. Gold prices have continued the slide seen on Tuesday (-0.58%), as the USD held strong on higher treasury yields. Copper currently up 0.4% at USD 6773.50/tonne as Chinese demand remains strong. This demand is not seen in Chinese rebar however, which is currently down for the fourth straight Wednesday, at USD 559.90/t

Looking at the day ahead, the main focus is likely to be the April PPI report in the US ahead of the all important CPI tomorrow. March wholesale trade sales and inventories data will also be released while in Europe the only data of note is the March industrial production print in France. The Fed’s Bostic is also due to speak again, later in the evening. It’s worth noting that Japan PM Abe is also due to host South Korean President Moon Jae-in and Chinese Premier Li Keqiang.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior -2.5%
  • 8:30am: PPI Final Demand MoM, est. 0.2%, prior 0.3%;
    • PPI Ex Food and Energy MoM, est. 0.2%, prior 0.3%; PPI Ex Food, Energy, Trade MoM, est. 0.2%, prior 0.4%
    • PPI Ex Food and Energy YoY, est. 2.4%, prior 2.7%; PPI Ex Food, Energy, Trade YoY, prior 2.9%
  • 10am: Wholesale Trade Sales MoM, prior 1.0%; Wholesale Inventories MoM, est. 0.5%, prior 0.5%
  • 1:15pm: Fed’s Bostic Speaks on Economic Outlook and Monetary Policy

DB’s Jim Reid concludes the overnight wrap

After much speculation Mr Trump last night announced that the US will leave the Iran Nuclear deal which has been the focal point for markets this week. The mini-roller coaster ride for WTI oil started a few hours earlier as it dropped -4.38% following a CNN story which noted the Iran accord may not collapse altogether. It then pared back losses after President Trump announced the US will leave the accord and re-impose the sanctions on Iran. Notably, the sanctions are subject to 90-180 days of wind down (petroleum related transactions have 180 days) and he also added that the US is willing to negotiate a new deal with Iran. As we type this morning, WTI has recovered to $70.64/bbl ($68.11 at yesterday’s lows), slightly below Monday’s intra day YTD highs and c.17.5% up in 2018.

In terms of other initial reactions, the EU leaders and Iran’s President Rouhani noted they will aim to continue to comply with the deal’s terms, although France’s President Macron added “we’ll work collectively” on a wider accord. Elsewhere, Treasury Secretary Mnuchin said he didn’t expect the sanctions to raise the oil price, since “to a certain extent, some of this was already in the market on oil prices”.

Following on, DB’s Michael Hsueh noted that because of the 180-day winddown period, neither Iranian oil production nor exports will drop before the 5 November 2018 effective date. In fact, if behaviour follows the example from 2012, there is the possibility of a short spike in Iranian exports just before the effective date, after which a slow decline may set in. In his note, he considers the possibility of a pullback in the oil price as a result of the 5 remaining JCPOA partners continuing to import Iranian oil at existing levels. However, with increasing likelihood of a third year of crude oil market deficit in 2019, and no sign of OPEC retreat, he would look for opportunities to accumulate long exposure on Brent weakness. Refer to his note for more details.

Over in equities yesterday, US bourses fluctuated before closing virtually flat (S&P -0.03%; Nasdaq +0.02%; Dow +0.01%). Have the 3 main bourses ever collectively closed so close to being unchanged? Within the S&P, modest  gains in the energy and financials sectors were broadly offset by losses from telco and utilities stocks. Across the pond, European equities were broadly lower (DAX -0.28%; FTSE -0.02%), weighed down by the Italian FTSE MIB (-1.64%) as Bloomberg reported that the leaders of the two largest parties opposed the idea of a “neutral government”, thereby raising the likelihood of fresh elections, potentially as early as 8th July.

Now moving to government bonds, the yields on UST 10y nudged up 2.6bp to 2.977% (2.985% in Asia) in part as Fed Chair Powell endorsed the market pricing on rates, indicating that “…market participants’ expectations for policy seem reasonably well aligned with policymakers’ expectations” and that “markets should not be surprised by our actions if the economy evolves in line with expectations”. He added that “there is good reason to think the normalisation of monetary policies in advanced economies should continue to prove manageable” for emerging economies. Over in Europe, the yields on 10y Italian BTPs jumped to the highest since late March (+10.3bp) given the aforementioned political developments, while Bunds (+3.3bp), Gilts (+4.5bp) and OATs (+4.0bp) also rose in sympathy.

This morning in Asia, markets are trading mixed with the Nikkei (-0.38%) and Kospi (-0.27%) both down while the Hang Seng (+0.40%) and Shanghai Comp. (+0.06%) are up. Elsewhere, the UST 10y yield is up c1bp.

Back to yesterday and the US dollar index firmed for the third consecutive day to the highest since late December (+0.40%). The Euro fell -0.49% while Sterling was marginally lower at -0.07%. Over in EM, the Argentina Peso pared losses to -2.43% vs. the Greenback yesterday, in part as Argentina’s President Macri said he has “spoken with IMF Director Lagarde (for assistance), and she confirmed we would start working on an agreement”. Reuters and local newspaper Clarin noted Argentina is seeking a US$30bln financing deal with the IMF to “strengthen growth” and help avoid crises as in the past.

Away from the markets, there seemed to be more political traction in North Korean. China’s President Xi has met with North Korea’s leader Kim Jong Un over the past two days and the Xinhua press agency has quoted Kim saying “as long as relevant parties eliminate the hostile policy…against North Korea….(we) do not need to have nuclear weapons, and de-nuclearisation is achievable”. Elsewhere, President Trump has despatched US Secretary of State Pompeo to Pyongyang to prepare for the upcoming summit between himself and Kim later on.

Now reverting back to Italian politics, our European economists believes that while a July election is unusual for Italy, it is a possibility, in part as the other option of voting in September may be too risky in the eye of the president, as there is no guarantee that a clear majority might emerge. Further, a vote in September may not leave enough time to approve the budget, while a July election would reduce the risk of not changing 2019 budget which currently includes a VAT increase that could seriously damage the Italian recovery. Overall, they believe in the coming days we will see if the moral pressure of the President on the parties to support this neutral government will bear fruits or not.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the JOLTS job openings rose to an all-time high and was above expectations at 6.55m (vs. 6,1m). Meanwhile the quits rate rose to a new cyclical high of 2.3%, signalling that job seekers may be increasingly inclined to leave their jobs in search of a better deal. Elsewhere, the April NFIB small business optimism index was slightly above market (104.8 vs. 104.5 expected). In Europe, Germany’s IP print was above expectations and rose the most since November, leading to an annual rate of 3.2% yoy (vs 3% expected). The March trade surplus was €25.2bln (vs. €22.5bln expected) as exports outpaced a decline in imports (4.0% yoy vs. 1.6% yoy). Overall, our European economists interpret these data as being consistent with their estimate that the German economy grew 0.3% qoq in Q1. Elsewhere, the UK’s April Halifax house price index fell to 2.2% yoy (vs. 3.2% expected).

Looking at the day ahead, the main focus is likely to be the April PPI report in the US ahead of the all important CPI tomorrow. March wholesale trade sales and inventories data will also be released while in Europe the only data of note is the March industrial production print in France. The Fed’s Bostic is also due to speak again, later in the evening. It’s worth noting that Japan PM Abe is also due to host South Korean President Moon Jae-in and Chinese Premier Li Keqiang.

READ Oil Surges, 10Y Yield Back Over 3%, Futures Jump In Iran Deal Fallout On ZH

Author: HEDGE

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