The US is “a lot closer today than we were yesterday” to a military confrontation with Iran, former Trump critic-turned sycophant Lindsey Graham said Thursday, after the IRGC shot down a US drone near the Persian Gulf. “God knows what tomorrow brings”, he added.
Iran hawks both in the Trump administration and on the Hill are itching for a fight and senators are divided on whether the president can invoke the 9/11-era “authorization for the use of military force” in the course of taking action against Tehran following the incident, which marked the latest in a series of escalations and came just hours after the Quds-backed Houthis launched a cruise missile at a Saudi desalination plant.
Meanwhile, the president himself seems intent on defusing the situation. During remarks to reporters on Thursday, Trump suggested the decision to shoot down the unmanned surveillance craft might have come from a “loose” general acting “stupid”.
In addition to being an absurdly colloquial way to talk about a potentially serious military escalation, the “theory” (if that’s what you want to call it) is all kinds of ridiculous and doesn’t seem to be shared by the Iranians.
“[We call on the international community] to demand the US put an end to its continued unlawful and destabilizing measures in the already volatile region of the Persian gulf”, Iran said, in a letter to UN Secretary General Antonio Guterres.
In any case, none of it matters for markets right now. US equities closed at a fresh record high Thursday thanks to Jerome Powell and an ongoing dovish shift from policymakers.
The dollar slid for a second day. The greenback’s two-day loss is the largest since February of 2018.
“For the US Dollar, Fed rate cuts and somewhat softer US growth likely point to choppy downside in the months ahead, as rate reductions gradually eat into elevated USD carry [although] admittedly, this could take some time to play out, given attractive carry-to-vol levels at present”, Goldman wrote Thursday. “However, if realized, the narrowing in rate differentials implied by markets would take the Dollar’s carry advantage closer to historical norms–especially if volatility were also to rise.”
Between the sagging dollar and the Iran tensions, oil surged to its best daily gain of the year. As noted first thing Thursday, the latest escalation in the Mideast will be a true test for crude, which has struggled to move higher despite geopolitical angst and supply concerns in the face of global growth jitters and swelling US supplies.
Assuming there’s some kind of amicable meeting between Trump and Xi that lifts a bit of the gloom off the global growth outlook and if markets latch onto the reflation narrative as central banks double, triple and quadruple down on accommodation, oil may finally get a lift.
Energy shares had their second-best day of the year.
Gold is finally ascendant, thanks to the dream combination of dovish central banks, safe haven appeal, central bank reserve buying and the falling dollar.
Oh, and the investment grade credit ETF logged a third straight outsized gain, and has risen in eight consecutive sessions.
Ultimately, everything is bid thanks to the promise of a return to stimulus and the warm, cozy feeling everyone gets from knowing that the first Fed cut is just six short weeks away. Indeed, with the spread between 2-year yields and the funds rate now down around -60bp, Powell and co. have little choice.
For now, rays of sunshine emanating from stimulus hopes and the prospect of a cordial Trump-Xi meeting are more than enough to penetrate the fog of war.
But, as Lindsey Graham not-so-elegantly put on Thursday, “God knows what tomorrow brings”.
