Markets
Israel’s overnight airstrike on Iran’s nuclear facilities was met by a retaliatory drone attack several hours later. Israel doesn’t appear to backdown though with media around noon reporting a second wave. According to US president Trump “there’s a lot more to come”. At the heart of the conflict lies Iran’s nuclear enrichment programme of which it says is for civilian purposes only (nuclear energy). But Israel and the US fear military use is the actual endgame. Talks between the US and Iran failed to produce a new nuclear deal and when Trump’s unofficial two-month deadline lapsed yesterday, Israel pounced. Risks for the conflict to spread into a wider war in the region responsible for around one third of oil output launched the price of a barrel of Brent 13% higher at some point. Gains are currently around half of that with Brent trading around $74.2/b, the highest level since early April. Other pockets in the market showed a kneejerk risk-off reaction. Gold ekes out a 1.1% gain to $3424/oz, near the recent record highs. There’s a classic safe haven run unfolding in currency markets with the likes of CHF and JPY showing some gains. EUR/CHF touched a low just north of 0.93 before bouncing back to 0.936 currently. Yen gains stay more limited. The Japanese currency even loses out against the USD (USD/JPY 144.2). The dollar’s reaction function was an interesting once. Right after the Israeli air strike news broke the greenback briefly fell, including against the euro. It’s potentially indicative of lingering doubts on the USD’s role as a safe haven. The dollar then recovered quickly, probably thanks to the sharp uptick in oil prices. It came right on time for the USD with an important technical break looming in the likes of EUR/USD. The pair tested the 1.16 big figure yesterday and a break higher would have boosted odds of a return back towards 1.2349. DXY avoided a drop sub 98 that would prelude a further slide to at least 94.65/95.24. GBP/USD was showing a similar USD-distressed technical picture around 1.36. The CAD and NOK, both oil currencies, are doing just fine given the market circumstances. Initial safe haven flows in core bonds completely reversed at the start of European dealings. Current net daily changes vary between +1.5-2.1 bps in the US. For the ECB in particular this oil price shock is potentially an important element for its forecasts. It downwardly revised its CPI projections last week, amongst others due to lower energy prices. KBC Economics raised the June CPI nowcast to 2.05% from 1.87% (from 1.9% actual inflation in May) should current oil prices hold. The front end of the German yield curve marginally underperforms, adding around 2 bps compared to 1.4 bps at the long end.
News & Views
The Bank of England today published the results of the quarterly survey of public attitudes on inflation. The survey showed a limited decline in in inflation expectations for the short-term horizon, but expectations remained at historically high levels. Expectations for price growth over the next year eased slightly from 3.4% in the February survey to 3.2%. Expectations for the period between one and two years’ time was unchanged at 3.2%. Expectations for inflation on a five year horizon stay at 3.6%. The public also perceived UK inflation in early May to have been at 4.7% (was 4.9% in the February survey). This compares to UK (headline) inflation being reported at 3.5% for April (from 2.6% in March). UK May inflation data will be published on Wednesday next week. The Bank of England has a regular policy meeting on Thursday next week. The survey also respondents the assess whether the BoE is ‘doing its job to set interest rates to control inflation’. This net approval balance rating rose to a positive 6.0% from 1.0%.
The European Commission today published its assessment on the need for nuclear investments by 2050. According to the EC, delivering on the Member States’ plans regarding nuclear energy will require significant investments of around €241 bln until 2050. This will be necessary both for lifetime extension of existing reactors (€36 bln) and for the new-build of large-scale reactors account for €205 bln. The EC notes that some EU countries see nuclear energy as an important component of decarbonization, competitiveness and security of supply strategies. The Commission estimates that over 90% of electricity in the EU in 2040 will be produced from decarbonised sources, primarily renewables, complemented by nuclear energy. Nuclear installed capacity across the EU is projected to grow from 98 GWe in 2025 to 109 around GWe by 2050. The EC indicates that In 2023, nuclear energy provided 22.8% of the EU’s electricity generation.
