Decision on Iran Sanctions Weighs on Financial Markets

Oil to New Three-Year High

WTI crude oil futures surged past $70/barrel to their highest levels since 2014 during the early part of today’s trading session.  Heightened geopolitical uncertainty has been driving much of the recent increase in prices (+10% in the past month). Specifically, President Trump’s threat to remove the US from the international accord struck in 2015, which eased economic sanctions on Iran in exchange for ending its nuclear program, is hanging over the market.  With President Trump set to announce his decision on the matter tomorrow at 2pm Eastern, there exists a real possibility that the deal is decommissioned entirely, which could result in the purging of Iranian oil exports and further constriction of the global supply.  Trump’s tweet about his decision timing prompted a reversal in risk-on trading, and crude oil prices pared gains from earlier in the day.

All three major US stock indices finished in the positive, albeit well off session highs following the Iranian deadline news.  The tech-heavy NASDAQ closed 0.8% in the black, while the S&P 500 and DJIA posted gains near 0.4%.  US Treasurys held within a tight range throughout the day, with yields/swap rates inching ~1bp higher as the 10-year note yield remained near 2.95%.  Cryptocurrencies didn’t fare well during the session, with Bitcoin losing more than 2% — not helped by the comments from Warren Buffett and Berkshire vice chairman Charlie Munger, who went as far as to label bitcoin as “rat poison” and described the market action as “somebody else is trading turds and you decide you can’t be left out”.             

This afternoon financial markets were presented with the rhetoric of newly appointed Richmond Fed president Thomas Barkin, who acknowledged the presence of a “remarkably strong” economy that is “above trend growth”.  Barkin suggested that the Fed “probably ought to go to neutral” in terms of monetary policy, whereby in March the FOMC updated its neutral rate to 2.9%.  As per Fed Fund futures, there is currently a 92% probability of a quarter point rate hike by the Fed at its next meeting in June.    

Uptick In Business Spending Forecast

According to the semi-annual forecast produced by the Institute for Supply Management, procurement managers expect to see a jump in capital spending for 2018.  The expected increase of 10.1% for manufacturing spending was up from the last report, released in December, where spending increases were only expected to rise by 2.7%.  In the service sector, investment was forecasted to rise by 6.8%, compared to the 3.8% estimated in the December report.   Manufacturing managers expected hiring up to be up from the prior survey, while service managers did not change their hiring expectations from the December report.  Despite the continued tightening of the labor market, only 53% of manufacturing managers and 36% of service managers reported needing to raise wages to attract talent.