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Yesterday, a relief rally was underway covering virtually every corner of the market. Bonds rallied, equities rose and within FX the winners and losers were defined by a reversal of the trends that had previously emerged each time the Iranian conflict reared its head. The catalyst for the relief rally were headlines from news outlet Axios that the US had prepared and sent a one-page memorandum of understanding to Iran detailing the roadmap to possible de-escalation.
Despite the reports being unconfirmed initially, the price adjustment took place in a relatively orderly fashion. We have seen similar moves before, notably the President’s claim on social media in late March that a deal was near. That claim, as you will recall, was promptly denied by Iranian news outlets and caused a prompt reversal of the initial risk-on rally. Despite the vast scope for such a scenario to unfold again yesterday, the relief rally was relatively convincing and sustained. There was, at most, some sideline speculation from semi-official Iranian news agencies that Iran may reject such a deal blueprint having rejected similar possibilities in recent days.
There remains an air of caution within the market whilst a response and further details of the White House’s longer-term intentions come to light. One of the benefactors of yesterday’s risk rally was Sterling and UK gilts alike. Benchmark 10-year rates fell circa 12-basis points while the FTSE and Pound rallied. That all comes ahead of today’s major risk event within the UK: local election day. The results of such voting won’t be visible until the early hours of tomorrow morning and in any case the key political actions that might be forced by such votes will take longer still. However, Sterling could be undermined by uncertainty today especially given yesterday’s price action.
Discussion and Analysis by Charles Porter
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