DB Early Morning Reid Macro Strategy

Deutsche Bank Research Early Morning Reid - Macro Strategy

Key Market Data (Index @ Close // Change) (S&P 500 @ 7724 // -0.17%) (STOXX Europe 600 @ 657 // +0.04%) (iTraxx Crossover @ 250 // +3) (Brent Oil^ @ 79.10 // +0.03%) (10yr Treasury^ @ 4.61 // -1 bp) (10yr Bund @ 3.11 // 0 bp) (Dollar Index^ @ 99.73 // -0.11%) (Further Fed hikes/cuts priced for 2026 @ 31 // -1 bp) (Further ECB hikes/cuts priced for 2026 @ 36 // -1 bp) ^ - Change from previous day's 4:30 GMT to 04:30 GMT

After an initially strong run, the week’s equity rally began to run out of steam by the close yesterday, with the S&P 500 (-0.17%) finishing just shy of the previous day’s record high, whilst the Stoxx 600 (+0.04%) just about edged up to another all-time high. That came despite a slew of strong corporate earnings and Iran saying that it has reached agreement with Oman on a proposed route through the Strait of Hormuz. While the timing of any Hormuz re-opening is still uncertain, oil prices are slightly down this morning, while Treasury yields are also dipping slightly after being little changed yesterday amid a batch of mostly solid US data. Meanwhile, a more cautious tech mood has solidified in Asia hours overnight with the KOSPI (-4.18%) and Hang Seng (-1.75%) retreating. NASDAQ futures (-0.13%) are also down this morning even as those on the S&P 500 (+0.16%) are edging higher.

Starting with the Hormuz story, yesterday brought another step forward after Iran said an agreement with Oman had been reached on a proposed shipping route through the Strait and that a joint statement was now in the final drafting stage. However, Iran’s Deputy Foreign Minister also said that this would represent a “temporary route” for the next 2-4 months and would “not mean the full reopening of the Strait of Hormuz”. Iranian state media also reported that reopening Hormuz would be contingent “on a change in US behaviour”, perhaps referring to Tehran’s demands that the US lifts its naval blockade.

Markets have seen plenty of false dawns throughout this conflict, and while the detail is becoming more concrete, attention is now shifting from whether an agreement can be reached to what the final arrangements will look like, including unresolved questions around whether Iran will eventually be permitted to levy tolls on vessels using the Strait. Meanwhile, President Trump sounded somewhat ambivalent on deal prospects last night,

saying he will “see what happens” in ongoing negotiations with Iran, after having suggested on Tuesday that a deal could be announced within 48 hours.

Markets nevertheless continue to lean towards a positive outcome, although much of the good news now appears priced in. Brent crude edged up +0.11% to $79.45/bbl, whilst WTI fell by - 0.73% to $75.22/bbl. European natural gas futures dropped -6.29%, extending one of their sharpest declines of the year and leaving them down -13.3% over the past week. Brent crude is -0.38% this morning.

With oil moving mostly sideways, the 2yr Treasury yield declined by -1.0bps to 4.18%, whilst the 10yr was unchanged at 4.61%. Those muted moves came as the Treasury Department announced quarterly refunding of $125bn, in line with expectations, whilst maintaining guidance that auction sizes would be unchanged for at least the next several quarters.

The slight decline in front-end yields also came as pricing of a September Fed rate cut eased from 58% to 54%, the lowest this has been since the more hawkish signal sent back at Warsh’s first FOMC meeting on June 12. In terms of the latest Fedspeak, Minneapolis Fed President Kashkari, who dissented in favour of a hike at the July meeting, said that “now is the time to start slowly” raising rates. Meanwhile, Fed Governor Cook sounded more conditional on the potential need for hikes, saying that “If I do not see signs of continued disinflation soon, I am prepared to act”.

The modest pull back in Fed hike pricing came alongside a mostly resilient set of US economic releases. We did see a bit of softening in the labour market signal, with the ADP report showing employment growth of 44k in July (vs 65k expected) ahead of tomorrow’s payrolls report. Whilst slightly softer, it remains consistent…