May 8, 2018, by Lorcan Roche Kelly
President Donald Trump is poised to announce his decision on whether the U.S. will leave the 2015 Iran nuclear agreement at 2 p.m. Eastern Time today, with most expecting an exit from what Trump has dubbed the “worst deal ever.” While the market is positioned for the headline risk posed by a renunciation of the pact, analysts are warning of “untold repercussions” from second- and third-order effects given the deal’s complexity. Following yesterday’s rise to the highest level since 2014, oil is slipping ahead of the announcement, with a barrel of West Texas Intermediate for June delivery trading at $69.87 by 5:45 a.m.
Federal Reserve Chairman Jerome Powell said market projections for the monetary-policy outlook are “well aligned” with expectations held at the Fed, in a speech at a conference this morning in Zurich, Switzerland. He also argued the role of U.S. interest rates in driving capital flows in and out of emerging markets — and global financial conditions, more generally — shouldn’t be overstated. His comments come as investors become ever-focussed on U.S. bond supply, while the incentive for holding long-term Treasuries diminishes.
The World Trade Organization holds a general council meeting in Geneva, Switzerland today, with the agenda showing there’s likely to be a clash between the delegations of the world’s two largest economic powers. Chinese Ambassador Zhang Xiangchen will criticize the Trump administration’s proposed tariffs, while his U.S. counterpart will find fault with China’s retaliation. The face-off comes only days after talks with Treasury Secretary Steven Mnuchin in Beijing ended with little progress. Data released overnight showed that China’s trade surplus with the U.S. increased by $22.2 billion in April, the first increase since November.
Overnight, the MSCI Asia Pacific Index rose 0.5 percent, while Japan’s Topix index closed 0.4 percent higher, with banks and pharmaceutical firms leading the advance. In Europe, the Stoxx 600 Index was 0.2 percent lower at 5:45 a.m. as investors awaited Trump’s Iran decision and worries over a new election in Italy weighed on equities. S&P 500 futures pointed to a lower open, the 10-year Treasury yield was at 2.952 percent, and gold dropped.
Italy’s benchmark FTSE MIB Index is the worst-performing major European equity gauge this morning, dropping as much as 2.3 percent after the leader of the populist Five Star Movement rejected the idea of a non-partisan prime minister. That opens the door to a new round of elections in the coming months. In the U.K., Prime Minister Theresa May is facing more problems, with another defeat likely for her flagship Brexit legislation in the House of Lords. While that could be reversed when the bill returns to the House of Commons, it is not clear that May has sufficient support from her own party’s MPs to overrule the changes.