Despite waking up to the news that the US rejected Iran’s peace proposal, and that the Strait of Hormuz remains closed, despite the fact that US crude rebounded back above $100pb – a more than 5% jump this morning with no retreat yet – the Korean Kospi index – which had been one of the most sensitive indices to oil prices – is up by more than 4.50% to a fresh ATH at the time of talking. Elsewhere, the Nikkei is struggling to push higher with a 1.71% retreat from an ATH, while the S&P500 and Nasdaq futures are flat, with Stoxx and FTSE futures even pointing to meagre gains.

It’s hard to make sense of the market reaction, it feels like the calm before a storm – higher energy prices will hit the ground sooner rather than later as Middle East tensions prolong and the world’s energy stockpiles dry out.

But that’s something investors are apparently not willing to think about this morning. So let’s talk about more encouraging news.

Friday’s US jobs data came in as good as it possibly could. I noted that the best possible outcome would be higher-than-expected job additions combined with softer-than-expected wage growth – and that’s exactly what the data printed: 115K new nonfarm job additions versus 65K expected, and 3.6% wage growth on a yearly basis, up from 3.4% a month earlier, but softer than the 3.8% expected by analysts.

In simple terms: that’s the sweet spot, the best of both worlds from a market perspective. It means that the US jobs market is weakening, but remains healthy enough to rule out an immediate meltdown, while wage growth remains above the Federal Reserve’s (Fed) 2% inflation target and is still accelerating, but less than pencilled in by analysts. Cherry on top, Michigan’s 1- and 5-year inflation expectations were revised lower, a sign that the Iran war and rising energy prices have not pushed inflation expectations further up. Consumer sentiment and the way people perceive market conditions weakened, but hey, that didn’t necessarily demoralise investors on Friday, especially not when the US 2-year yield eased on relief that the Fed could stay quiet, with no need to intervene to fight inflation… yet.

The US 2-year yield kicked off the week higher – yes, bond investors care more about the jump in oil prices than tech investors do – but the S&P 500 and Nasdaq futures look serene again. The Dow is a bit less comfortable though, with a 0.20% decline at the time of talking.

Anyway, Friday’s sweet jobs data gave another boost to equity markets. The S&P500 and Nasdaq traded at fresh record highs. The Nasdaq rallied 2.35% as AI names led the rally again, and this time despite some less-than-ideal headlines. First, TSMC posted its slowest pace of monthly revenue expansion since October, while CoreWeave – an Nvidia-backed neo-cloud provider – saw its shares drop more than 11% after giving a disappointing outlook. Together, the news revived concerns that torrid AI growth may not be sustainable in the coming years. But again, that didn’t prevent VanEck’s Semiconductor ETF from surging nearly 5% to a fresh ATH level!

At this point, I am really wondering what will cause this rally to retrace, because at some point, we will see a correction. The S&P500 is up by nearly 17% since the beginning of April and has been trading in overbought territory since mid-April. Earnings beats surely explain the enthusiasm and strong appetite seen over the past two weeks, but the fact that the sharp rise in energy prices doesn’t bother anyone is curious. Really curious.

This week, attention will shift to inflation figures. While European inflation is expected to confirm heating price pressures in April due to higher energy prices – likely coupled with softer growth readings – expectations for US CPI are rather balanced. According to estimates, US headline inflation may have even slowed on a monthly basis in April. On a yearly basis, however, we could see a rise from 3.3% to 3.7%. That’s because the Iran war-related jump had already started creeping into last month’s inflation figures, making the monthly figure look less threatening than the yearly one. But inflation within the 3–4% range remains well above the Fed’s 2% target – let’s remember that – and will continue to keep Fed hawks alert.

It is however worth noting that current levels remain below the painful 5–7% inflation range seen after Covid and during the Ukraine war-led energy crisis. So to me, a reasonable inflation print could keep investors in a sweet mood if doves outweigh hawks on the idea that there is no need for a Fed rate hike this year, unlike European peers that are expected to raise rates – for some, like the European Central Bank (ECB), as soon as the June policy meeting.

That dovish divergence, if confirmed this week, should continue to weigh on the US dollar outlook in the medium run. In the short run, however, the dollar’s direction will continue to be driven by oil prices. Higher oil prices should support the dollar, while lower oil prices would let it soften. That’s why we are seeing a rebound in the US dollar index this morning. Though I must admit that even the dollar’s rebound looks soft compared to the gravity of the headlines. For longer-term traders, geopolitically driven, oil-led US dollar rallies remain interesting opportunities to sell the tops against major peers, though with a great deal of volatility to manage as headlines rapidly change.

This week, besides the war headlines, investors will also closely watch the US President’s first visit to China since 2017. Talks will likely be tense. Trump needs major headlines to divert attention from Iran, but China today is becoming more powerful than ever thanks to its technological catch-up, EVs, and other energy-transition industries. China’s trade surplus jumped 65% in April in USD terms, despite a 25% rise in imports, likely due to higher oil prices. Inflation in China also accelerated in April because of rising energy prices, but China has been fighting deflation since post-Covid and therefore has more room to withstand price pressures than many Asian and Western peers.