Generally speaking, it’s not a good bet that benchmark US equities will fall six weeks in a row.
Far be it from me to champion blind dip-buying, but if blue chips are down five weeks running, you almost don’t need the context. At the very least, you can be confident a lot of other people are ready to jump aboard given the dearth of buying “opportunities” in a world where meaningful de-ratings for cap-weighted indexes are rare. You can piggyback on those people’s bid.
And then there’s modern market structure which says, among other things, that mechanical de-risking will run its course eventually, and then reverse course in the event volatility subsides.
It thus wasn’t terribly surprising when US shares snapped a five-week stretch of war-driven losses earlier this month. That the S&P managed another, even larger, weekly advance on the back of Iran ceasefire hopes was almost as predictable given the proximity of Donald Trump’s timeline on winding down the war.
To be sure, Trump put markets through the wringer coming out of the Easter holiday. Even for a US president with a penchant for dark theater, the genocide brinksmanship to which the world was subjected this week felt extreme.
But he ultimately backed away from the abyss, and assuming (not safely) that he can curb Benjamin Netanyahu’s worst impulses in Lebanon, or least convince the Israelis to give his envoys enough time to negotiate with the Iranians in Pakistan, Trump’s got a shot at getting US shares back to record highs.
As of Friday afternoon in the US, the S&P had nearly recouped its war losses to trade within 3% of the late-January record.
Not too bad considering the existential nature of the conflict.
Or perhaps, as one commenter remarked this week, this is precisely what you should expect in the presence of a possible apocalypse — after all, if the worst comes to pass, everything’s irrelevant, so why not buy the dip?
If you’re inclined to scoff on the way to offering a snarky rejoinder (e.g., “Let me count the reasons!”), I won’t blame you. Lebanon’s hardly the only outstanding issue.
There’s the “small” matter of the world’s most important oil chokepoint, for example, which is either open or closed depending on who you ask. While I imagine Trump would be just fine with a non-public, backdoor arrangement that finds Tehran sending 25% of each $2 million toll directly to him via an untraceable crypto wallet, that’s not a viable long-term solution. And then there’s Iran’s missing nuke material which seems… I don’t know. Still relevant?
Market pricing for the Fed trajectory has settled into a range which suggests a little less than 1/3 odds of one 25bps cut by year-end.
As the updated figure above reminds you, the hawkish extremes were seen on March 26/27 when traders briefly priced even odds of a hike.
Friday’s inflation update out of the US, despite showing a predictably enormous spike on the energy index, was actually quite tame under the hood. When you throw in the prospect of a lasting truce with Iran and a change of leadership at the Fed, it’s not unreasonable to start penciling back in some easing.
The concern is that even if traffic through the Strait resumes as normal in relatively short order, some of the damage is done. “The logistical realities and bottlenecks can’t fix the physical differentials stress, as inventories are depleted and tanker gaps remain wildly disrupted,” Nomura’s Charlie McElligott remarked.
In other words, the six-week disruption in the Strait will manifest on a lag, and whether that biases overall inflation higher will depend on any offsets from unaffected categories.
In the near-term, the market narrative obviously hinges on headlines out of Islamabad, where JD Vance may come face to face with Bagher Ghalibaf.
On Friday, Ghalibaf added one more demand: All of Iran’s “blocked assets” overseas should be unfrozen. Trump threatened to kill him. “The only reason they are alive is to negotiate,” he said, referring to Ghalibaf and Abbas Araghchi.
What world is this? The fact that you can say our president might secretly take a 25% bribe from these Iranian tolls, and some of us would totally believe it could happen, almost boggles my mind. But with Trump, nothing you could say is impossible !
The last paragraph gives me hope that negotiations are off to a good start.
Isn’t it great? I thought that was a perfect Friday closer.
Perfect closer indeed. It’s very funny in a situation that’s not supposed to be funny. Sounded a bit like the lines being said in an action film before $h.t starts blowing up.
I am certain that his negotiation process — and any eventual treaty with Iran — will be every bit as gratifying as his tariff plan.
On fire today. The close on the last few articles I read are chef’s kiss.
What’s to worry about. The internationally recognized super terrific negotiator of many decades is on his way to Pakistan. I mean, what of any consequence has JD ever negotiated. Not only does the job require lots of experience, it also requires authority of which Vance has none. And Iran holds the Hormuz ace. Trump wants the straight open and he wants a cut of the ‘beautiful’ tariffs. His MAGA troops will believe he’s ended the nuclear threat just because he tells them he has. It’s not enough for the Iranians. They know Trump throws away the rest of his term if he sends in troops. Americans generally are so self centered they don’t bother to understand other cultures, which makes successful negotiation impossible. What will the 8 year old in the White House do with his little hands up against the wall. Someone please hide the football.
So the Overton Window now includes a glimpse of armageddon but no chance of a recession or a no-bid air pocket? This frog is getting pretty hot. Dated Brent hit $144 Tuesday and is still above $130 post-ceasefire while front-month futures trade at $98 — the physical market is telling you the paper market is wrong. Saudi infrastructure took 1.3M bpd offline Thursday and nobody blinked.
But the market needs to signal ‘all clear’ before that physical-paper spread, 4.8% Michigan inflation expectations, and negative gamma loading next week can combine into something the vol surface isn’t pricing. Meanwhile, Bloomberg reported today that the Fed is actively examining bank exposure to private credit after a surge in redemptions, and Treasury is separately questioning insurers about the same exposures. The banks apparently got the memo first — CDX Financials, a brand new CDS index covering banks, insurers, REITs, and BDCs, launches Monday morning. Convenient timing, that.
Oh, and Anthropic’s Mythos Preview is finding thousands of critical-severity bugs across major operating systems and browsers, and they’re handing it to 50+ companies with $100M in credits. CRWD dropped 8%, ZS dropped 12%. The cybersecurity moat thesis is being rewritten in real time and nobody’s talking about it because there’s a war on.
I’ll take the 3.3% t-bill yield and let my left and right tail hedges fight it out on the positions I can’t sell for tax reasons.
Q4 2018 is my working analog. Two traps in both directions before the trough, then the Fed blinks with the policy response. Except this time the Fed is frozen at 3.75% debating hikes while the consumer just printed 47.6 sentiment. The blink may take longer to arrive. Sorry for the long post.
+1
TL;DR “I’ll take the 3.3% t-bill yield and let my left and right tail hedges fight it out”