Asian stocks rise and oil price slips amid hopes of US-Iran peace deal – business live | Business

Mohit Kumar, of the broker Jefferies, explains that a US-Iran deal could have a greater impact on investors’ expectations for interest rate movements this year than in the stock market.

In terms of market reactions if a deal is agreed upon, we should see another leg higher in risky assets and lower in rates. However, positioning suggest that the rates market should see a greater reaction than equities.

For equities, we are still bullish, but believe that the easy part of the rally is behind us. S&P positioning has reached just above 5, while Eurostoxx is at +2.2. Positioning is not extended yet, but beyond the relief reaction of a deal, we do not see a massive move higher from these levels. European equities can get a boost higher in the near term simply because positioning is much less crowded than in the US.

For rates, positioning is on the short side, with [US Treasuries] positioning just below -4 and Bunds close to -3. The recent rally in rates has led to some short covering in both US and Europe, but we still see more room to go. Our view remains that the front end of Europe, UK and the US are still mispriced. For the ECB, we can see one hike (in June), simply because they have to justify their inflation credibility. However, we do not see a series of rates hikes and maintain our long position at the front end of the curve.

For Fed and the BoE, we maintain the view that the next move would be a cut and not a hike. Markets have repriced in the UK with only 35bp of hikes priced for this year and less than 2 hikes till terminal. Our view remains that the BoE would be taking rates towards 3% by middle of next year and keep our long position at the front end of the curve.

For the Fed, we do not see a Warsh Fed delivering any hikes. For us, the question is when and not if there will be a cut. From a fundamental perspective, we would argue that near term inflation would be high and hence will be difficult for Warsh to deliver a rate cut before mid-terms. But there is a political element, and eventually it would depend on how soon oil prices drop below $80 and central banks start treating the latest oil price shock as a transitory effect on inflation rather than leading to second round effects. Our base case remains one of 2 rate cuts over the next 12 months.