US CPI in focus as peace talks help to buoy the market mood

European indices are starting the day in the green, with small gains across the continent. The oil price remains below the $100 per barrel level, and Brent crude is currently trading just above $97. Interestingly, European stocks are bucking their most recent trend. They did not rise on a Friday for the duration of the war, as traders tended to scale back risk at the end of the week, wary of an escalation of the conflict. However, the fact that stocks are rallying today could be a sign  of optimism about the peace talks scheduled between Iran and the US for this weekend.

There is still a lot of uncertainty and the ceasefire remains fragile. For example, President Trump condemned Iran for not reopening the Strait of Hormuz, while Iran demanded blood money from those that attacked Iran. This does not suggest that a sustainable peace plan is close, however, traders may look through the brinkmanship from the two sides, which is to be expected after all that has happened in the last month, and look towards negotiations in the coming days.

What would successful peace talks look like?

The question for traders at the end of the week is what successful negotiations look like? At this early stage they are unlikely to lead to a peace deal, the best hope is that an agreement is reached to re-open the Strait of Hormuz so that tankers are ensured safe passage. If this does not happen, we could see a serious bout of risk aversion at the start of  next week, with oil prices surging and stocks reversing this week’s gains.

Although Brent crude is up more than 1.5% today, it is still down 10% this week, its steepest loss for 9 months, which leaves it vulnerable to a reversal if peace talks are not positive. Likewise, stocks are on track for a strong week, the S&P 500 is currently up 3.7% and the Nasdaq is higher by 4.5%. US indices are outperforming their European counterparts this week, the Eurostoxx index is higher by 3% and the FTSE 100 is up 2.4% on a USD basis. The top performers are Asian indices, and the Nikkei is currently higher by 7%. The performance of stocks this week could tell us something about the future direction of global indices once this conflict is resolved.

Europe pays record high for North Sea crude even though oil prices are in retreat

There is concern that European equities could take a hit from earnings downgrades on the back of surging energy prices. This crisis has once again exposed Europe’s energy security vulnerabilities, which may leave a lasting effect on corporate profits. North Sea oil prices, which is now the main supplier to European and Asian refineries, hit a record high today on the eve of peace talks and after sharp declines in spot oil prices. Forties oil, which comes from the North Sea, rose to $147 a barrel, as the blockage at the Strait of Hormuz is halting all supplies of Gulf energy reaching Europe and traders are rushing to secure energy from elsewhere. There is an actual physical shortage of oil right now, and although the markets may be in a more jubilant mood this week, the prospect of stagflation is still a major threat across the world, but particularly in Europe where growth was weak to begin with.

This highlights the lasting damage this conflict may do to the European economy. Earnings season is already under way in the US, but it will ramp up in the coming weeks. Forward guidance from European and UK companies will be watched closely to assess the lasting damage from this conflict.

US inflation to signal impact from Middle East conflict

Ahead today, we will see how the conflict has impacted inflation as US CPI is released at 1330 BST. Analysts expect a sharp jump to 3.4% for headline inflation, up from 2.4% for March, core CPI is expected to rise by a more moderate 2.7%, up from 2.5%. If we get a higher reading for headline CPI this could make it hard for Fed to cut rates this year and would suggest a lasting inflationary problem, which could weigh on risk sentiment later today and boost the dollar.