Hopes of a deal are high once more, as AMD surges after earnings

The Middle East conflict is dominating sentiment on Wednesday, oil prices are plunging and stocks are being led higher by European shares, which are surging. US indices are also extending gains above Tuesday’s record highs. The news that Iran and the US could be close to striking a peace deal is driving risk sentiment. Brent crude oil has plunged 7.2% and is trading at $101 per barrel.

This is a news-driven market and another leg lower for oil and a leg higher for stocks will depend on the news that is coming out of the Middle East. The news so far on Wednesday suggests an abrupt deescalation compared to earlier this week. Iran has confirmed that it is reviewing a new US proposal, and reports from Pakistan, where mediation between the two sides is taking place, suggests that a one-page memorandum to end the war could be produced very soon.

We have been promised peace deals before, which have then failed to materialize, so while the market is wiling to trade on the back of this deescalation, it will take further concrete steps to end the war and reopen the Strait of Hormuz before the oil price can meaningfully fall below $100 per barrel for Brent crude.

Sources in Pakistan are holding out hope that the Strait will be reopened, a memorandum would be followed by  discussions to unblock shipping through the Strait. This will also include the US ending sanctions on Iran and the agreement of curbs on Iran’s nuclear programme. The sources said it could take 30 days of detailed negotiations to reach the holy grail of reopening the Strait. Thus, there is still some way to go before this war is over and transport of commodities can flow through the Middle East.

For now, things are moving in the right direction. It is not just stocks and commodities that are moving on the back of this news, bonds are also surging. UK yields are backing away from Tuesday’s 28 year high, and are trading around 5.6%, 10-year yields are also lower by 11bps today, and are back below 5%. UK bonds are outperforming their US and European counterparts. This may ease some fears that UK yields were rising at an uncontrollable speed. It also suggests that yields are rising due to inflation fears. When the oil price falls and the inflation threat is reduced, UK bonds react and UK yields retreat.

There is still a political risk premium attached to UK bonds, this is why UK yields have risen at a faster pace than their global counterparts during this war. However, today’s news and price action makes the backdrop to Thursday’s local elections a little more benign.

The news that a deal was  at the negotiation phase came at the right time. The US’s ‘Project Freedom’, designed to escort vessels through the Strait of Hormuz, was largely ineffective and the markets did not take kindly to it. The oil price rose to $114 per barrel earlier this week, and European and Asian shares also came under pressure. The elevated oil prices also triggered FX volatility, as rumours swirled that the Bank of Japan intervened to weaken the yen.

A deal and deescalation that causes a substantial decrease in the oil price could have a deep impact across asset classes. It could also ease upward pressure on the dollar and reduce the chance of further FX intervention and thus volatility in the currency markets. The dollar is weaker across the board on Wednesday, and the yen is one of the strongest currencies in the G10 FX space.

No one knows how this latest peace plan will pan out; however, the market is willing to trade on hope at this stage. Although US stocks are underperforming relative to Europe on Wednesday, we think that US stocks are better poised in the long term due to more strong earnings reports. Uber and Walt Disney are soaring on Wednesday after both companies pointed to resilient US consumer spending, and Walt Disney topped analyst expiations for Q1 earnings. AMD is also a top performer on Wednesday, and is higher by 15% after it saw huge demand for its central processing units, the company also doubled long term forecasts for revenues, as AI agents continue to drive tremendous demand in the overall AI cycle. AMD, which has continues to rise even though it has risen 86% so far this year, is a sign  that the AI trade is alive and well.

All in, this is a positive day for risk sentiment, but we need more news flow and a concrete deal for it to continue.

Chart 1: AMD share price surges on the back of strong earnings

Source: XTB