US/ Iran Peace talks to resume

The oil price is down sharply after reports that Iran’s foreign minister is heading to Islamabad for US/ Iran deescalation talks. The impact of this news is a sharp decline in Brent crude oil, which has dropped 1.5% to $104.00. We have not had confirmation that the US delegation will engage in these talks, but US stock futures are also popping higher. Nasdaq futures are higher by 1.3% as the tech rally gets a boost from the declining oil price, while the S&P 500 is up 0.5%, at session highs.

European indices are also reversing earlier losses, and the Dax is posting a gain on this news, while the Eurostoxx index is roughly flat. The Nat Gas price is also down sharpy, and  the dollar is lower. The markets are now pricing in a second round of talks, but we may need additional clarity to sustain this rally. However, as we move into the US session,  investors are anchoring themselves to this good news and seem to be happy to buy risky assets, as it suggests a deescalation of the situation ahead of the weekend.

These may not be peace talks, we need confirmation from the White House before we can confirm what this talks aim to achieve. This highlights how complicated the situation is, and how difficult it will be to get a peace deal between the two. One thing is for sure; Pakistan and others are working hard behind the scenes to bring both sides to the table to try and end the impasse regarding the Strait of Hormuz.

In recent days, Iran has said that it needs to see the US end its blockade of the Strait of Hormuz to engage in further peace talks. Does this mean that we should expect to hear an announcement from the White House that President Trump is willing to end the blockade? This would be the dream scenario for equity bulls, but it is not clear that this will happen. For now, as we wait to hear from the US, the market may fade this initial move higher for stocks and the downside for oil, but Brent crude could remain below $105 per barrel for as long as the potential for talks to take place remains.

We have pointed out the inverse correlation between the Nasdaq and the oil price, when the oil price falls, tech stocks have rallied. This is one reason why Nasdaq futures are surging in the pre-market. The rally in Nasdaq futures is also a sign of the stock market’s preference for tech. The Nasdaq 100 is higher by 0.8% this week, which is compared to a 0.4% gain for the S&P 500, and a 1.6% decline for the FTSE 100. Added to that, there has been a record 17-day rally in semiconductor stocks, which is a record.

We expect tech to dominate today, as  Intel is rallying 27% in the pre-market. Its stock price is already higher by 50% in the past month, and today’s move is supported by stronger earnings. Q1 revenue rose by 7% YoY, and data centre revenue rose by 22% in the past 12 months. Gross margin was an impressive 41% and Q2 revenue forecasts were also strong, the company is guiding between $13.8bn – 14.8bn. Intel also announced new chips for its CPUs and said that demand for its CPUs, which are the brains for a data centre, is expected to remain strong for the foreseeable future. Overall, Intel is becoming a force in the AI space, and this supports its stock price as the AI trade is back in fashion.

Gains are also expected for Meta and Microsoft. Both companies announced job cuts on Thursday. Meta is cutting 10% of its workforce, or 8,000 jobs, as AI costs surge and it commits another $135bn to AI investment. Microsoft is also offering 7% of its staff redundancy packages to reduce headcount. It is worth noting that these job cuts have more to do with over hiring during Covid rather than an AI revolution. The market may like these cost reductions for now, and their share prices have risen in the past month, Meta is higher by 10% and Microsoft is up by 8%, however, we need to see if all this AI investment can reap benefits with fewer staff to execute new products and new AI models.  The cost reductions from these job cuts is a drop in the ocean compared to what Meta and Microsoft are spending in AI investment, and the market may not be too impressed with this news for long.

For now, investor enthusiasm is high, after an uncertain few days for investors. The oil price remains below $105 per barrel and stock futures in the US are still close to session highs. If US/ Iran talks this weekend can trigger a breakthrough and the reopening of the Strait of Hormuz, then there could be further upside for stocks and more downside for oil. However, that is a big if.