Oil futures experienced a slight decline on Thursday, reflecting the markets’ subdued response to the ongoing tensions in the Middle East. Despite the potential for escalations, particularly from Israel, the week passed without any new significant developments that might worsen the situation. On the New York Mercantile Exchange, June delivery West Texas Intermediate (WTI) decreased slightly by 0.06% to close at $82.10/barrel. In a similar trend, Brent crude for June delivery fell by 0.21%, or $0.18, settling at $87.11 per barrel on the Intercontinental Exchange.

Despite these provocations, Israel has yet to respond, although retaliation remains a distinct possibility. Prime Minister Benjamin Netanyahu has publicly committed to taking all necessary measures to defend Israel, as reported by Oxford Economics. The financial markets have remained relatively calm in the face of these events, suggesting a low expectation of a broader conflict. The future actions Israel might undertake remain unclear, especially considering the delayed response so far. Should Israel decide on substantial military retaliation, it could intensify the regional tensions, notes Oxford Economics. Furthermore, Julius Baer, in its baseline scenario, does not foresee a major escalation in Middle East conflicts. This outlook offers a glimpse of potential stabilization in oil markets despite the current geopolitical frictions.

As the sun rose on Thursday, the financial world watched closely as the U.S. dollar resumed its ascent, settling at R$5.25. This modest increase signaled a continuing trend influenced by speculative insights into interest rates across the United States and Brazil. Investors scrutinized every bit of data, dissecting the potential shifts that could impact their strategies. In this financial narrative, statements from Roberto Campos Neto, President of Brazil’s Central Bank, have become central. Similarly, comments from U.S. Federal Reserve officials, including John Williams, President of the Federal Reserve Bank of New York, are also focal points.

Williams’s remarks about the lack of urgency to cut interest rates underscored the robust state of the U.S. economy, propelling the dollar’s value upward. Meanwhile, at a Washington event, Campos Neto addressed the complications arising from a strong dollar. He highlighted Brazil’s strong external accounts and the Brazilian real’s floating nature, enhancing Brazil’s global economic stance. The Central Bank’s data showed a net positive foreign exchange inflow of $1.278 billion for April. This occurred despite $4.236 billion exiting financially, offset by $5.514 billion entering commercially.

U.S. Dollar Edges Upward, Influenced by Interest Rate Speculations

Market responses were immediate, with the commercial spot dollar climbing by 0.12% and the tourism dollar increasing by 0.55%. Futures trading reflected similar sentiments, pushing the dollar up by 0.38% to 5.258 points. Amid shifts, the Brazilian Central Bank managed currency fluctuations by auctioning 12,000 swap contracts for July 2024 maturities. This financial episode occurs amid ongoing U.S. inflation and strong economic data, influencing expectations for Fed rate cuts. Additionally, rising Middle East tensions have reinforced the dollar’s status as a safe asset, linking global events with financial markets. This mix of economic and political factors highlights the dollar’s resilience amid global uncertainties.

The Ibovespa, Brazil’s primary stock index, narrowly avoided a seventh straight day of losses by closing slightly higher, marking a marginal increase of 0.02%, to settle at 124,196 points. This small rise followed a dip to its lowest point of 2024 earlier in the day at 123,396 points. Concurrently, the Brazilian Real appreciated slightly by 0.12% to R$5.25, hitting a daily peak of R$5.28. Domestic fiscal issues and global uncertainties continue to exert pressure on the market. Lucas Queiroz, a fixed income strategist from Itaú BBA, noted the Federal Reserve’s recent hints at dependency on economic data for future interest rate cuts. The Fed is expected to delay monetary policy changes, waiting for a significant inflation slowdown over the next three months.

Itaú BBA now anticipates that rate cuts may not commence until December, despite market expectations for a September start. “Adjusting rate cut expectations with each inflation report during an election period is unproductive,” Queiroz commented. This approach aims to support ongoing economic stability and achieve a 2% inflation target. Brazil’s economic strategies are affected by global uncertainties, acknowledged by Fernando Haddad, Minister of Finance, and Roberto Campos Neto, Central Bank President. They suggest that rising global tensions might necessitate a reassessment of their risk management strategies. XP’s chief economist Caio Megale noted in a Morning Call that increasing U.S. interest rates complicate global inflation control strategies.

Market Insights

On the trading floor, Vale shares started strong due to an uptick in iron ore prices but faltered as the day progressed. Petrobras shares saw fluctuations but gained modestly, influenced by mixed oil price signals and reassurances on stable fuel pricing. Meanwhile, merger talks between Azul and Gol Airlines have reportedly advanced, significantly impacting their stock movements.