FX markets steal the limelight, as US stocks start May on a high note

The main focus on Friday is the FX markets, as the fallout from the energy price spikes cause havoc in currency markets, particularly in Asia. The yen popped higher once again on Friday, after rising sharply on Thursday on rumored intervention by the Japanese authorities. USD/JPY is down nearly 2% so far this week, and is trading at 156.60, the lowest level since late February.

A 2% move may sound mild, especially compared to the wild gyrations in oil and stock markets in recent months, however, after remaining relatively calm compared to other asset classes this year, FX is now on the move. This has huge implications for inflation and growth rates around the world and central bank policy. The BOJ intervened to stem the yen’s decline to contain inflation caused by the energy price spike, after USD/JPY reached a high above 160.50 earlier this week.

Will there be oil market intervention

FX may not be the only market that the Japanese authorities intervene in, Bloomberg is reporting that Japanese officials are willing to intervene in the crude oil futures market too, in an attempt to stem oil price volatility. If this were to happen, this would be a whole new level of intervention in financial markets. It would be a difficult thing to pull off, as oil price moves are due to global supply and demand considerations. If the authorities were to intervene in the futures market, it may look like a limit on buying or selling futures during volatile times. While Japan has not confirmed they will do this, it would be an interesting market dynamic, especially if other countries followed.  

In the broader FX space, the pound is also at its highest level vs, the USD since mid-February, EUR/USD also had a strong month, and rose more than 1.6%, as the support for the dollar withers even though the blockade in the Strait of Hormuz carries on.

NatWest struggles with high expectations

Elsewhere, most European markets are closed for a public holiday, while the FTSE 100 is giving back some of Thursday’s gains, and is down 0.5%, led lower by the miners and NatWest. Miners have been a drag on the index as the gold price continues to slide on Friday, after dropping 1% in the past month. NatWest topped analyst estimates for profits, which rose by £2bn last quarter. Its full year profits guidance was also at the top end of estimates between £17.2bn and £17.6bn, as the war in the Middle East keeps interest rates higher for longer, which boosts net interest income. The share price is down 4%, defying these strong results, after the CEO sounded a note of caution on the impact from the energy price spike, and the bank increased its bad loans provisions to more than £280mn. There was also some disappointment that the bank did not deliver a more robust full-year earnings upgrade. For now, that is limiting the upside for the FTSE 100, which had a disappointing April compared to its US counterparts, rising only 1.35%, vs. a 12% gain for the S&P 500.

Markets get more resilient to higher oil price

US indices are edging higher at the start of a new month, after reaching a record high on Thursday to round off a stunning rally in US indices in April. US indices posted their strongest monthly gain since Covid, and were boosted by a strong first quarter earnings season, particularly from the likes of Google, Apple, and Eli Lily. Combined with a strong growth outlook for the US, and roaring tech stocks, the index has plenty of catalysts to keep this rally going.

The impact of the war in the Middle East and the oil price is having a less noticeable impact on financial markets even as the blockade of the Strait of Hormuz remains in place and as Iran and the US trade threats about ending the ceasefire. This does not mean that a rising oil price is not a major focus, but in the coming weeks, rising oil prices may have a bigger impact in the FX market and interest rate futures market, compared to the global stock market, which could get a boost from positive earnings revisions in the coming weeks.

US markets get a boost from energy majors and Apple

Ahead of the US open, the market will focus on Apple’s share price, which is higher by 3% in the pre-market, US indices are also pointing to a higher open later today. However, in contrast to their European counterparts, US oil majors have reported a drop in earnings for Q1. Both Chevron and Exxon have reported results this morning, and profits fell compared to a year ago. A combination of weak oil prices at the start of the year, mistimed financial hedges, and shipments that were not delivered by the end of the quarter were not included in the results, even though the value of their products had soared. Exxon also took a $700mn hit to revenues last quarter due to supply disruptions at its Middle East hubs.

Although both companies reported stronger than expected results, Exxon’s net income declined by 45% compared to a year ago, and Chevron’s fell 36%. There was no windfall from rising oil prices for US oil majors, although both companies expect the situation to resolve within 2 quarters and Exxon and Chevron’s share prices are both higher in the pre-market. These results highlight how complex events in the Middle East are for the oil market, and the damage it is causing on a broad scale.

Chart 1: USD/JPY

Source: XTB