Limited progress on the negotiations between the US and Iran has pushed oil prices modestly higher on the week closing at 109+ for Brent, as persistent physical constraints continue to build pressure amid still limited visibility on the reopening of the Strait of Hormuz. We now expect Brent prices to remain sticky in the low $100/bbl even after the Strait reopening, eventually averaging $95/bbl for CY2026, as the bottleneck will shift from the physical chokepoint of the Strait to tanker availability and strong demand to rebuild inventories. DM rates are pricing in hikes aggressively against our modest expectations. The US money market curve (1Yx1Y OIS minus effective Fed funds rate) is now +vrly sloped with markets pricing ~30bp of hikes by June’27 (against our expectations of a 25 bps cut in Q4CY26), while €STR and SONIA curves are pricing between 2 -3 25bp hikes by the ECB (75bp) and BoE (66bp) before year-end vs. our call for a cumulative 50bp (June and September) and 25bp (July hike) respectively. In Fx, while the broad Dollar is close to flat over the last few months, that obscures larger shifts under the surface and quietly building Dollar appreciation pressure. We have been emphasizing that terms of trade have been a key differentiator for FX returns in this more divided Dollar environment, and it is increasingly clear that two major forces—the energy shock and AI-driven demand—are responsible for the shortages causing that move. As the past week has demonstrated, we think the clearest risk for a stronger Dollar is if a wider energy shock begins to pressure growth, policy, and prospective returns in other developed countries, particularly Europe. In the credit space, the absolute level of defaults has been trending higher from the very low levels that persisted in 2022/23 but remains near historical median levels. Interestingly, in contrast to the prevailing market narrative related to potential disruption of Software-focused firms, the sector composition mix still skews heavily towards capital industries and consumer-facing businesses. None of the metrics we monitor signal a near-term uptick in expected defaults in the US. In Europe, we still envision a modest increase in defaults through year-end, owing to a more challenging growth, inflation, monetary policy mix. To summarise, we are bullish on 10yr Gilts, 10yr Bunds, bearish on Gold & Silver, bullish on DXY specially against EUR & JPY. We like 2*10 US steepeners and like receiving 1yr-1yr forward US SOFR. We are neutral on equities now and on Brent see a range of 95-120 for REMCY26. We like selling IVs in commodities especially crude and buying IVs in precious metals & DM equities.
