At the stroke of a headline: markets adrift
War or peace? Markets react to news that the conflict is about to end or that it may drag on, guided by a compass that points them in a direction currently unknown.
After the sharp rises fueled by last week’s headlines amid a radical shift in Trump’s policy (he declared he would end the war even with the Strait of Hormuz closed), which the US press reported as: «Trump seeks to exit Iran with the strait still closed…,» the question we’ve been asking ourselves for the past few weeks arises again: why and for what purpose did the US president send thousands of troops to the region? The Trumpian charade of confusion continues.
This led to a strong surge of relief in global equities and fixed income, but not a clear turning point . The rebound in prices was aided by the high level of oversold conditions in both equity and bond markets, which were celebrating the prospect of a short war.
Euphoria quickly turned to disappointment within hours following new statements from Trump , this time aggressive and further distancing him from a possible agreement with Iran. Global markets reacted with caution and a negative response. Concerns about oil prices and the risk of stagflation returned to the headlines due to the increased likelihood of a prolonged trade war that would exacerbate the energy crisis.
For all these reasons, it is likely that the «volatility of volatility» will continue to accompany us for some time, while markets, without a reliable compass to guide their behavior, continue trying to guess what the future holds in terms of geopolitics and economic policy.
Fund interest rates
Central banks have adopted the discourse of buying time and avoiding possible hasty reactions.
The Federal Reserve’s (Fed) rate hike that had been assumed a few days ago is no longer so clearly priced in, and there is still potential for a fall in the yield of US Treasury bonds , especially in short maturities, and therefore a rise in their price if cuts in official rates are expected.
Powell , still chairman of the Fed, made it clear a few days ago that inflation expectations have remained within a range compatible even with rising oil prices, although he also acknowledged that the Fed is simply not prepared to deal with an energy supply crisis and a resulting runaway surge in oil and natural gas prices. We’ll see this Friday when the official data on price trends in the US for March is released, and tomorrow, Wednesday, when the Fed minutes are published.
For her part, European Central Bank (ECB) President Christine Lagarde reiterated that the decision to raise deposit rates will depend on the impact of the war in Iran. Currently, the market is assigning a probability of around 40% to a rate hike at the ECB meeting on April 30.
According to preliminary data, Eurozone inflation accelerated to 2.5% last March, compared to 1.9% in February. The war in Iran is therefore driving inflation upwards while simultaneously hindering economic growth . I believe the ECB is determined not to repeat the monetary policy mistake made during the pandemic, when inflation was initially considered transitory. We shall see.
Peace at any price is what investors crave.
As we know, the economic impact of the war will depend on how long the Strait of Hormuz remains closed and oil prices remain high.
The performance of equities and fixed income (the latter being the worst performer in this crisis) will be favorable, as explained above, when investors anticipate an imminent end to the war, and the opposite if they expect the conflict to drag on. However, the fact that uncertainty surrounds us does not mean inaction , but rather making more gradual moves tailored to each investor’s risk aversion level and, provided the portfolio is well-balanced, avoiding taking new positions in any asset other than short-term fixed income.
The risk premium will remain high, as the implications of Iran maintaining control of the strait are an unknown factor for energy prices . Furthermore, what if Donald Trump were actually planning a surprise attack on his own, given all these twists in the conflict’s narrative? Nothing good…
PS: Trump already has something surefire to «sell» to his public; I’m referring to the rescue of the two downed fighter pilots. It might seem like a minor issue compared to the depths of the war and its thousands of deaths, but for the American president and his communications machine, it isn’t. That’s how Trumpism and his war work.