Prudence in focus in Europe with geopolitics and outcomes

A person rides a bicycle near the Milan Stock Exchange (Italian stock exchange)

by Claude Chendjou

The main European stock exchanges are expected to open lower on Tuesday as the prospect of a truce between the United States and Iran diminishes, with Tehran warning Washington of the risk of a “quagmire.”

According to initial indications, the Paris CAC 40 is expected to lose 0.26% at the opening. The Dax in Frankfurt could decline by 0.23%, while the FTSE 100 in London is expected to drop by 1.11%. The EuroStoxx 50 index is expected to remain stable and the Stoxx 600 to decline by 0.05%.

Geopolitics is likely to determine the trend on Tuesday, with both the United States and Iran conducting military interventions in the Gulf on Monday. Washington is seeking to regain control of navigation in the Strait of Hormuz, while Tehran responded to the U.S. maritime blockade by targeting a tanker site in the United Arab Emirates.

This has resulted in a drop in stock prices, a surge in oil prices, a rise in bond yields, a strengthening of the dollar, an increase in volatility indices, and appreciation of gold.

“Although we are seeing a clear trend towards risk aversion, we have not yet seen significant movements that would likely accompany a full escalation of hostilities,” tempered Nick Twidale, chief market strategist at ATFX Global.

The season of corporate earnings reports continues with companies like AB InBev, Sabadell, HSBC, Unicredit, Pfizer, Uber, and Advanced Micro Devices (AMD).

In terms of macroeconomic indicators, ahead of Friday’s official monthly U.S. employment report, a closely watched indicator of economic health and interest rate trends, the market will focus on the Jolts survey and the ISM services index.

On WALL STREET

The New York Stock Exchange closed lower on Monday as a South Korean ship fell victim to an explosion in the Strait of Hormuz on the first day of “Project Freedom,” launched by President Donald Trump to evacuate stranded commercial vessels in the Gulf.

The Dow Jones index fell by 1.13%, or 557.37 points, to 48,941.90 points. The broader Standard & Poor’s 500 lost 29.37 points, or 0.41%, to 7,200.75 points. The Nasdaq Composite retreated by 46.64 points, or 0.19%, to 25,067.801 points.

In ASIA

The Tokyo Stock Exchange remained closed on Tuesday for a public holiday, as did mainland Chinese financial markets.

The Hang Seng index in Hong Kong dropped by 1.11%, with increasing tensions in the Middle East weighing on investor sentiment.

The MSCI index for Asia-Pacific (excluding Japan) lost 0.30%.

KEY STOCKS TO WATCH IN EUROPE:

FOREX

The dollar rose by 0.18% against a basket of reference currencies, as renewed Middle East hostilities boosted demand for safe-haven assets.

The yen stabilized at 157.27 per U.S. dollar, not far from its highest level in two months after several sessions of strong gains since last Thursday, when sources told Reuters that authorities intervened in the foreign exchange market to halt a sharp selling wave.

The Australian dollar slightly declined by 0.19% to 0.71535 against the U.S. dollar following the RBA’s decision to raise interest rates for the third consecutive time to curb inflation.

The euro fell by 0.09% to 1.1680 dollars, while the pound sterling traded at 1.3518 dollars, down 0.10%, as both currencies suffered from the strengthening of the greenback amid risk aversion.

BONDS

The yield on the U.S. ten-year Treasury bond, which rose by seven basis points on Monday to 4.44%, edged down slightly on Tuesday to 4.43%. The U.S. ten-year bond recorded its highest daily increase in almost six weeks as Iranian attacks in the UAE and the Strait of Hormuz drove up crude oil prices and fueled inflation concerns.

The German Bund yield remained stable at 3.07% after rising by about 2.5 points the previous day, as markets feared the European Central Bank (ECB) would raise interest rates to contain inflation.

CRUDE OIL

The oil market slightly declined on Tuesday after rising by nearly 6% the previous day. The U.S. Navy managed to escort a Maersk company vessel in the Strait of Hormuz, easing immediate concerns about supply disruptions.

Brent crude fell by 0.84% to $113.49 per barrel, while West Texas Intermediate (WTI) crude declined by 1.87% to $104.42.

MAJOR ECONOMIC INDICATORS ON TUESDAY MAY 5:

FR 06:45 March budget deficit n.d. -32.12 billion

USA 14:00 April ISM services 53.7 54

USA 14:00 Job openings (Jolts) March 6.835 million 6.882 million

(Reporting by Claude Chendjou, Editing by Augustin Turpin)