Geopolitics has once again become the market focus. Israel's attack on Iranian facilities was met with retaliation from Iran, causing oil prices to surge and weakening market risk sentiment last Friday. The market is concerned about the risks of escalating conflict, particularly the possibility of Iran blocking the Strait of Hormuz and potential U.S. intervention, which will affect oil prices during the U.S. summer driving peak.
Meanwhile, the rise in oil prices has reached a two-year downtrend line, and a more convincing upward breakout could pose short-term risks to overall risk sentiment. However, the market generally believes that the impact of energy supply disruptions should be limited, such as rising production from Saudi Arabia, but the most sustainable path still relies on diplomatic solutions.
Notably, in this wave of conflict, the U.S. dollar and U.S. Treasuries have not seen a significant 'flight-to-quality' buying, indicating that global investors' concerns over capital flows into the U.S. still outweigh attention to the Middle East situation, which cannot be ignored.
Interest rate volatility has also fallen back to near multi-year lows, indicating that the macro market is more inclined to refocus on tariffs and economic fundamentals.
In fact, this wave of conflict has had almost no impact on market expectations for interest rate cuts in 2025, with the market still expecting only two rate cuts before the end of the year, even as inflation data has repeatedly come in below market expectations.
Before the changes last Friday, the market was celebrating the simultaneous decline in inflation data from several developed markets (excluding Japan), with U.S. CPI, PPI, New York Fed inflation expectations, and Michigan inflation expectations all coming in below expectations.
In fact, the recent core CPI has significantly undershot expectations, which helps boost risk sentiment and gives the Federal Reserve more room to maintain an accommodative financial stance.
Equity long-short hedge funds have re-accumulated long positions in stocks, with net exposure rising to a one-year high; the path of least resistance for the market in the short term remains upward.
Cryptocurrencies have once again validated their positioning as 'high-risk assets', with prices of various tokens plunging last week. On Friday, cryptocurrency prices fell along with the stock market, resulting in over $1.2 billion in futures positions being liquidated. The decline on Friday was primarily driven by altcoins, while BTC returned to around $105k supported by stable ETF inflows and corporate holdings.
BTC ETFs saw net inflows of $1.4 billion, while ETH ETFs just broke a record of over two weeks of net buying, showing that TradFi participation remains strong. We expect prices to continue to follow stock market sentiment and gradually rise as we enter the summer.
This week will see multiple central bank meetings (including the Federal Reserve, Bank of Japan, Bank of England, Norges Bank, and Swiss National Bank), but we believe the substantive impact will be limited. The Federal Reserve may signal a slightly dovish tone, and the market will focus on whether it will use the recent series of inflation data and weak jobless claims as a basis for further dovish shifts. We do not expect significant policy moves; the recent market focus will remain on the developments between Israel and Iran, particularly any substantial military escalation or dangerous political maneuvers, while the U.S. remains mired in a stalemate over tariffs and budget negotiations. Wishing everyone good trading this week!