Markets are showing a degree of weariness with the unfolding U.S.-Iran standoff, appearing to discount some of the nearer-term volatility even as Washington's blockade of Iranian ports comes into force. Reports over the past 24 hours indicating ongoing dialogue between the two sides and the prospect that talks could resume soon have been sufficient to push Brent and WTI crude prices back beneath $100 per barrel.
The pullback in oil helped to ignite a rally on Wall Street on Monday. The S&P 500 finished the day about 1% higher, leaving it above the level it stood at when the conflict began just over six weeks ago. That positive momentum continued into Tuesday, with Asian bourses closing in positive territory, European equities advancing and U.S. futures ticking upward. The dollar index also eased, slipping to its weakest level in roughly a month-and-a-half as risk appetite improved.
On the corporate front, earnings season is now well under way and is likely to remain centre stage this week as several of the largest U.S. banks report. Goldman Sachs provided the early read on Monday. While the bank beat headline profit expectations, underlying performance showed weakness in fixed income and currency trading, and its shares fell despite the overall beat. Bank revenue reached $17.2 billion for the quarter, the firm's largest three-month sum since the $17.7 billion recorded in Q1 2021.
Investors are awaiting results from JPMorgan, Citigroup and Wells Fargo, with expectations that the broader corporate scorecard will continue to look solid despite the oil shock that occurred at the end of the quarter.
At the same time, international institutions are preparing to update their macro outlooks. The International Monetary Fund is due to publish its World Economic Outlook today, and both the IMF and the World Bank have already signalled they expect to lower global growth projections and raise inflation forecasts in light of the conflict.
Domestically, the U.S. housing market showed signs of strain in March. Existing home sales dropped to a nine-month low, a decline attributed in the report to a softer labour market and weakening household purchasing power and wealth. Mortgage rates have been rising amid the Iran-related shock, complicating the outlook for the housing sector for the remainder of the year.
Trade data from China added another datapoint for markets to process. Export growth slowed markedly in March, with outbound shipments expanding by just 2.5% - a five-month low and a sharp deceleration from the 21.8% surge recorded in February. Economists surveyed had expected growth of 8.3%.
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Goldman Sachs' quarterly results underscore a bifurcated performance across trading desks. The bank reported better-than-expected quarterly profit, primarily driven by strength in dealmaking and equities trading, but shares fell about 2% amid evident weaknesses in fixed income markets, interest rate trading, mortgages and credit. Revenue at $17.2 billion marked its highest quarterly total since the Q1 2021 peak of $17.7 billion.
Events to watch today
- U.S. March Producer Price Index release - 8:30 a.m. EDT
- U.S. 12-month Treasury bill auction - 11:30 a.m. EDT
- Speeches by Fed officials: Michael Barr; Boston Fed President Susan Collins; Richmond Fed President Thomas Barkin; Philadelphia Fed President Anna Paulson
- U.S. corporate earnings: JPMorgan, Citigroup, Wells Fargo
- IMF publication of its World Economic Outlook - 9 a.m. EDT
For market participants, the juxtaposition of geopolitical headlines, central bank commentary, major bank earnings and key macro releases makes for a crowded news calendar. Traders appear to be weighing the odds that current tensions will ease sufficiently to restore oil flows, while also parsing the implications of slowing global trade and the prospect of downgraded economic forecasts from the IMF and World Bank.
In short, the market reaction over the last day has favoured risk assets, but the underlying data and scheduled announcements leave a number of cross-currents for investors to monitor as the week unfolds.