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Markets open the week less bullish on risk assets due to perceived AI overvaluations and US/Iran talks turbulence.
Following the signing of the MoU between the USA and Iran last week, talks between the parties and the usual mediators began over the weekend. The initial issues discussed were the reopening of the Strait of Hormuz and the conflict between Israel and Hezbollah. Iran is claiming an interest in Lebanon and for some reason the USA is indulging them, causing friction with Israel and a bind for the USA as the USA is committed to Israel's security, and Hezbollah started the war against Israel in 2023 as an act of naked aggression. The talks seem to be going as positively as they possibly could, but even as Vice President Vance was stating that the USA wanted to "turn over a new leaf with Iran", President Trump was issuing rude personal threats against Iranian leaders and threatening a resumption of the war. We must be prepared for this circus to continue for some time, and it will be hard to tell whether the talks are on their way to producing a peace deal, and what the terms of that deal might be. Ignore the noise and watch the market.
Stock markets have started the week somewhat wobbly as questions persist about an overvaluation of the AI sector. Tech stocks have seen huge gains within just a few months, and major indices are mostly unable to make new highs. This factor, coupled with fears that the talks between the USA and Iran will not lead to a peace deal, has put a minor chill on risk sentiment. However, the Japanese Nikkei 225 Index has advanced to a new high, and tech indices such as the NASDAQ 100 are showing small advances and are not far off their highs. As we have seen a consolidation in recent days, I see the NASDAQ 100 Index as a good buy if it makes a new daily record high closing price.
Crude Oil remains weak, with WTI trading lower and close to reaching a new 3-month low price, near $75 with lowering momentum. The falling price of crude oil is giving a tailwind to risk sentiment when it improves for other reasons.
In the Forex market, the USD/JPY currency pair has again advanced firmly and is just a few pips off making a new multi-year high price - trend traders will still be long of it, with the price getting a boost from the shift in risk sentiment and a bullish US Dollar. Since this week's open, the strongest major currency has been the US Dollar, and the weakest major currency has been the Canadian Dollar, as it was over the past week, putting the USD/CAD currency pair in some focus. The Canadian Dollar has been weakening as it is a petrocurrency and the price of crude oil dropped by quite a lot last week on news of the MoU signing between the USA and Iran.
Another reason the Canadian Dollar is in the spotlight is the upcoming release of Canadian CPI (inflation) data today, which is expected to show the rate of monthly price increase climbing from 0.4% to 0.7%.