•Meanwhile in markets, peace is still in the air. And thus, bonds and equities are merrily, albeit gradually, extending their recent gains;

•European equities are modestly higher, with gains of several tenths of a percent. Airline stocks and broader travel and leisure stocks – the hard-hit sector because of the war – are outperforming. I clock the Stoxx 600 Travel & Leisure sector 1.7 percent higher this morning, boosting five-day gains to 6.5 percent. That compares with a five-day gain of 1.8 percent for the Stoxx 600 itself;

•Bund and UST yields are back to flat, having erased the early morning decline in yields. With brighter prospects of a peace deal in the Iran war, hawkish ECB-pricing is being reversed. And rightfully so I must say again. With ECB doves pushing back vigorously against the hawks’ certainty of a June hike, ESTRs have shifted to greater odds of just two 25bps hikes this year compared to three at the start of the week. In numbers: the ESTR for the December ECB has taken a 25bps plunge to 2.54 this week. I can’t resist to refer to my relentless commenting that ECB rates were way overpriced with three hikes;

•Incoming Fed Chairman Kevin Warsh will likely be relieved that the market is no longer forcing him towards hikes. Earlier in the week, we were leaning towards a hike as the Warsh Fed’s first policy move. Now we’re back to a hold, with odds tilted slightly towards a cut further down the road;

•Elsewhere, Brent crude futures are below the $100 handle, albeit barely so. The broad dollar is modestly lower. NOK rallied strongly against the greenback after a surprise 25bps rate hike by the Norges Bank this morning. For lack of a better word, the yen remains ‘bid’ following a string of interventions and strong verbal talk to prop up the currency. USDJPY at 156.4 means that most of the intervention gains for the yen remain intact;

•Regarding the war (cannot not discuss it), my bias – ahem, suspicion – that Trump wants out of the war was confirmed again. This time by a story in Politico. According to the anonymous sources (anonymous, of course), Trump desperately wants peace. But he must save face first. The irony, according to the article, is that the Iranians feel the same thing: end the war and save face too. But our Art of the Deal President can’t seem to understand this self-evident axiom of diplomacy. That in situation like this, you cannot browbeat your opponent into submission or capitulation;

•According to another war-related story, the Chinese magazine Caixin just this morning reported that a Chinese tanker was attacked in the Strait of Hormuz on May 4. Two days later, Iran’s Foreign Minister Araghchi visited Beijing for talks. While I am sure the Chinese realize there’s much more at stake than just one oil tanker, I find Araghchi’s visit too much of a coincidence. Beijing must have felt angered. I also recall headlines on China’s Foreign Minister being unusually outspoken in calls for talks and peace and an end to strikes. I deduct that China is exerting strong pressure on the Iranians to come to an agreement with the US.

•So, we know where we’re headed: towards peace. Though not necessarily in a straight line. So, what about the progress on peace talks? From the fog of war on the peace talks we can deduce that the US and Iran have at least found common ground on several key topics, though not necessarily full agreement. They include extending the truce (highly likely a mutually shared objective) and reopening the Strait of Hormuz (a Gordian knot that must be untied). We have gleamed that the US has likely abandoned its demands for limits on Iran’s conventional military hardware: drones and missiles. But the fundamental issue that is Iran’s nuclear program remains gridlocked. Thus, we’re likely to see a partial deal first, with the incredibly contentious nuclear issue reserved for a later stage;

•Looking ahead, we have more ECB-speakers and Fed-speakers on tap. Regarding the former, expect the debate on the merits of (guiding for) a June hike to heat up. For now, that debate has weighed on rates further up the ESTR curve, not the ones reflecting the next meeting. Fed-speak has tilted hawkish as of late, but nothing suggests that they’re even thinking about hikes. Finally, there are  the obligatory US jobless claims om tap and the Czech National Bank meeting (a hold).

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