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Summary:
It was, by any measure, a day that struggled to pick a lane. Markets woke to the news that the United States and Iran had exchanged fire in and around the Strait of Hormuz in the most serious test yet of their fragile month-long ceasefire. Iranian forces fired missiles, drones and small boats at three US Navy destroyers transiting the strait. The US responded with strikes on Bandar Abbas and Qeshm Island. A US official then deployed what can only be described as the geopolitical equivalent of a straight face, insisting the exchanges did not constitute an act of war and that the ceasefire remained in effect. Trump, never one to undersell a moment, later described the strikes as a "love tap."
Centcom’s framing was more clinical but no less revealing. The command described its actions as self-defence strikes against Iranian military facilities, targeting missile and drone launch sites, command and control infrastructure, and surveillance nodes. The breadth of that target set suggested something more purposeful than a tap, light or otherwise. Trump subsequently told ABC that ceasefire negotiations with Iran are continuing, and that Pakistan has asked Washington not to pursue something called "Project Freedom" while those talks are ongoing, a detail that raises rather more questions than it answers. The president is scheduled to deliver remarks at noon Friday, 1600 GMT, on a subject the White House did not see fit to disclose in advance.
Away from the Gulf, Japan provided two data points that told a coherent if uncomfortable story. Real wages rose 1.0% in March for a third straight month, which is exactly what the Bank of Japan needed to see ahead of its June rate decision. The same war that rattled the Strait of Hormuz was meanwhile making itself felt in Japan’s services sector, where the April PMI slipped to an 11-month low of 51.0, input costs hit a 42-month high driven explicitly by Middle East fuel prices, and business confidence sank to its lowest since the pandemic. The BOJ wants to hike. The data is giving it permission and a warning at the same time.
On trade, the day offered something for everyone and certainty for no one. A US court struck down Trump’s 10% global tariffs in a 2-1 ruling, finding them unjustified under a 1970s trade law. Goldman Sachs promptly told clients not to get too excited, expecting an appeal before May 12 and a higher court stay that would keep the duties alive until their scheduled July 24 expiry, with replacement tariffs likely waiting in the wings regardless. Meanwhile Trump gave the EU until July 4 to implement the Turnberry trade deal or face higher tariffs, offering a temporary reprieve on car duties after a call with European Commission President Ursula von der Leyen. The message to Brussels: the clock is running.
In what passed for good news on Friday, South Korea reported a record current-account surplus of $37.3 billion in March, its 35th consecutive monthly surplus, with semiconductor exports rising nearly 150% and total goods exports hitting an all-time high of $94.3 billion. Chip demand, it turns out, is indifferent to geopolitical mood music.
Reform UK had a night to remember in the UK local elections, gaining more than 90 seats as Labour shed over 70 and the Conservatives lost more than 20. The result will accelerate the conversation about Keir Starmer’s position and, as Commerzbank noted earlier in the week, may yet add sterling to the list of things the market needs to worry about.
A busy Friday. The love tap heard around the Strait of Hormuz will set the tone for the weekend.
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Major FX traded limited ranges. Regional equities remained under pressure. Crude tracked in a limited range also, rising early but gibving it back. Reuters cited yen intervention over six days, April 30 – May 6, of US$67bn. Not a typo.
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