First Light News: One-page Memorandum, Many Questions

Deal Hopes Lift Risk Assets

According to reports from Axios, the US has presented Tehran with a one-page memorandum proposing to gradually reopen the Strait of Hormuz and lift the US blockade. I feel like we have been here before; Iran is expected to respond via Pakistani mediators within the next couple of days. At this point, we do not have much clarity, and I cannot help but think we may have travelled too far too soon in the markets.

President Trump, of course, added some colour to the proceedings, stating that the US has won, but at the same time warning that ‘bombing would start at a much higher level’ if Iran fails to agree. Markets clearly chose to focus on the former.

In the commodities complex, oil prices traded lower on the news, with Brent and WTI shedding 7.6% and 6.3%, respectively – marking the weakest levels since 21 April. Global equity benchmarks surged in parallel: the S&P 500 added 105 points (1.5%) to 7,365, and the Nasdaq 100 rallied 584 points (2.1%) to 28,599, with both once again posting record highs.

In the FX space, the USD index clocked its lowest level since the beginning of the Middle East conflict at 97.63, as renewed optimism prompted traders to unwind some of their safe-haven positioning. The USD/JPY is also continuing to hold around ¥156.40, following a notable downside move from the ¥160 neighbourhood – widely attributed to BoJ intervention.

Despite the enthusiastic market response, the proposal from the US leaves Iran’s nuclear programme largely unresolved. I am sure you have seen this, but Iran’s parliament speaker, Mohammad Bagher Ghalibaf, recently took to social media and wrote that ‘Operation Trust Me Bro failed’. Trump has repeatedly told markets and the public that a deal is close, that talks are going well, that Iran ‘wants to make a deal badly’, and, as we are all aware, each time, nothing has really materialised. I think Iran’s parliament speaker was essentially highlighting the need to stop believing what Trump says.

US ADP Beat – USD Unable to Rally

The April US ADP non-farm employment change landed yesterday and came in above consensus, showing the economy added 109,000 private-sector jobs, up from March’s revised reading of 61,000. Under the hood, education and health services drove the bulk of the gain (61,000), followed by trade, transportation and utilities (25,000).

While a beat reinforces the Fed’s higher-for-longer stance – which somewhat aligns with the recent 8-4 hawkish vote split – and should be USD-supportive, the buck’s recent risk-off unwind makes this a challenging print to have traded out of. The market is likely to continue selling rallies as geopolitics dominate the flow.

UK Elections Eyed

Closer to home for me, voters head to the polls today for the UK elections, which cover more than 5,000 seats. Markets will be watching this closely, as this election is essentially a poll on Prime Minister Keir Starmer’s survival as Labour leader and, by extension, the outlook for UK fiscal policy.

In terms of current market performance, the 30-year GILT yield recently spiked to 5.79% – reaching the highest level since 1998 – while 10-year yields topped 5% for the first time since 2008. I am sure you will remember that both GILTs and the GBP have responded negatively to signs of a Starmer departure in the past.

While bond yields are elevated – which I feel is largely driven by rising inflation and BoE hold/hike expectations this year – political risk premium is perhaps limited at this point. What this does is open the market up to a potential repricing. If fears of Starmer’s exit were to materialise, the market reaction would likely include rising yields and a weaker GBP, underpinned by concerns over fiscal discipline and political stability.

Investors Look Ahead to NFP Friday

Following better-than-expected US ADP numbers, macro focus shifts to tomorrow’s April US NFP print. Economists expect that the economy added just 65,000 jobs, down from 178,000 added in March, with the unemployment rate forecast to remain steady at 4.3%.

While ADP beat by approximately 30%, it is worth remembering that this only covers private-sector hiring and the correlation between ADP and the government release is poor. Therefore, despite a modest upside risk heading into tomorrow’s data, I seldom put too much emphasis on this correlation.

A weak NFP, however, would sharpen the tension between a slowing labour market and sticky inflation – a combination that leaves the Fed with few good options and could amplify volatility across rates, the USD and risk assets heading into the weekend.

Written by FP Markets Chief Market Analyst Aaron Hill