Credit Ágricole: FX Risk

Higher oil prices and the global bond sell off are failing to significantly deter investors from risk-seeking behaviour. Key to investor confidence is the AI investment boom. Investors may also believe central banks can bring their economies in for soft landings. Likely important on this front are oil and refined product prices.

According to some estimates, oil flows out of the Middle East are approaching pre-war levels despite the closure of the Strait of Hormuz, bolstering investor sentiment. Refined products remain in short supply, however, given that a significant amount of the world’s refining capacity is in the Middle East and still constrained by the US-lran war. Investors will therefore continue watching headlines for any progress in the US-lran talks. As long as hostilities do not resume, they may remain optimistic.

The resumption of hostilities would likely significantly damage sentiment. President Donald Trump’s pledge that a deal will be done after the US mid-term elections has essentially kicked the can down the road. In the meantime, US core PCE inflation data out later today will condition investors’ expectations for further rate hikes. Rising equity and FX market volatility and private credit spreads as well as the outperformance of cyclical stocks by defensive stocks put upward pressure on our Risk Index over the past week.

Capping the rise in the Index were falling gold prices and EM-Sovereign spreads. Among G10 currencies, only the CHF, CAD and SEK have significant positive correlations with our Risk Index. The GBP, USD and NOK have significant negative correlations with the Index.