Good morning. Financial markets are staging a muted recovery as the selloff in US technology stocks eases and tensions in the Middle East ratchet lower. Major indices are on course to extend yesterday’s advance at today’s open, and risk-sensitive assets are catching a bid, giving the euro, pound and yen room to gain against the dollar.

Oil prices are slipping from their highs as the conflict in the Middle East shows tentative signs of improvement. Iranian authorities announced an end to military operations against Israel, and Prime Minister Netanyahu said Israel would pause its strikes in return. President Trump told an audience in South Carolina that a resolution would come within two weeks, declaring it would be a “total victory” and that oil prices would come “tumbling down”.

Traders are staying cautious. By some estimates, Trump has made similarly reassuring statements at least 39 times since the beginning of the conflict, repeatedly calming markets only to see another escalation follow. The pattern—optimistic statements from the administration, relief rallies, and renewed hostilities—has become so familiar that each successive statement moves prices a little less*.

Global yields remain elevated after Friday’s stronger-than-expected jobs report, intersecting with two additional forces keeping upward pressure on borrowing costs: inflation data in the coming days that is expected to bolster the case for Fed tightening, and a flood of corporate issuance from the technology sector that is competing for the same pool of long-term capital. Consumer and producer price reports due tomorrow and Thursday are likely to help set the stage for a removal of the Federal Reserve’s dovish bias at next week’s meeting. But the supply of new paper may matter just as much: Amazon yesterday announced plans to issue $14bn in Canadian dollar-denominated bonds, and OpenAI said it had filed for an initial public offering, joining Anthropic and SpaceX in a push toward public markets—with the three listings expected to deliver a combined valuation of just under $4tn. Goldman Sachs estimates that the four largest hyperscalers will spend nearly $5.3tn on capital investment over the next five years, much of it raised from outside investors. Every bond sold and every share listed competes for capital that might otherwise flow into sovereign debt, adding a structural bid to yields that has little to do with the Fed.

The yen is almost unchanged, holding just below the 160-per-dollar threshold that has repeatedly prompted intervention. Finance Minister Satsuki Katayama warned that authorities are ready to take bold action to stabilise the exchange rate, and the Bank of Japan is expected to deliver a rate hike at next week’s meeting, with a second move likely later this year. But differentials with US rates will remain wide even after both moves, keeping the currency under pressure and the threat of further intervention alive.

The pound is unwinding some of last week’s losses, reflecting a softer dollar but also a reduction in perceived political tail risks. A by-election in Makerfield next week could return Andy Burnham to Westminster, paving the way for a leadership challenge against Prime Minister Starmer later this year. But the Greater Manchester mayor has spent the last few weeks reassuring markets that he would not open the fiscal taps or jeopardise stability in the gilt market**—and traders, for now, appear to believe him.

The Canadian dollar is moving higher in line with its global peers ahead of tomorrow’s central bank decision. We expect the Bank of Canada to leave policy rates unchanged and soften the slight hawkish bias evident in its last set of communications, even as officials signal readiness to move if inflation expectations show signs of unanchoring. The data support patience: although headline inflation rose to 2.8% in April, its highest level in nearly two years, it came in well below the 3.1% economists had expected, and core measures eased further, with an average of the Bank’s preferred trim and median metrics falling to 2.05%, marking the lowest since January 2021. Unlike the United States, where a tight labour market is giving price pressures room to intensify, the Canadian economy is operating with abundant slack, meaning inflation can be absorbed without a policy response. Swap markets still have at least one hike priced in by year-end, but that bet looks increasingly difficult to justify.

Canadian dollar traders remain remarkably calm. Three-month implied volatility in the options market has been higher in 98.4% of trading weeks since 2000—a striking level, given the confluence of upside and downside risks bearing down on the currency. Shifts in rate differentials between the Bank of Canada and the Federal Reserve, oil and commodity prices, global risk sentiment and the looming USMCA review could each move the loonie sharply in either direction. A high-conviction view is tempting but hard to defend: among other risks, a reopening of the Strait of Hormuz or an easing in US price pressures might push the dollar-Canada exchange rate into the low 1.30s, while persistent US inflation, weaker Canadian data or a tariff shock could drive it into the low 1.40s. Options pricing looks complacent—and corporate hedging books, I suspect, are in a similar state.

*A fairy tail involving a boy and a wolf comes to mind…

**No one wants to feature in a lettuce cam.