Five Market Takeaways From Another Hectic Week Of Geopolitical Headlines

It’s been a(nother) busy week of incoming news flow, with conflicting headlines galore, as participants have continued to closely monitor geopolitical developments, albeit while discerning some ‘signal’ from the ‘noise’ becomes increasingly difficult.

With that in mind, here are what I would argue are the five most important takeaways from the last few trading days.

1 – Trump Wants To De-Escalate

We came into the week with markets re-opening mere hours ahead of a deadline for Iran to re-open the Strait of Hormuz, else the US would conduct attacks on domestic power infrastructure. We end the week with that deadline having been punted not once, but twice, and with public comments from the Trump Admin having increasingly tilted away from escalatory rhetoric, and towards the idea of dealmaking.

Clearly, the situation remains highly fluid, and the US continues to amass military forces in the region, however this week has brought our first concrete signals that Trump is looking for a way out of the conflict. Recall, when strikes first begun, it was claimed that the operation would take between four and six weeks. We are now coming to the end of week four, so perhaps things are indeed moving along to the timeframe that was outlined all along.

2 – Trump Has A Pain Threshold

In light of the above, and the two ‘TACO’ moments that this week has brought along, it’s safe to say that not only is President Trump receptive to developments in financial markets, but also that there remains a pain threshold in terms of how significant an adverse market reaction Trump is likely to tolerate.

We’ve known for some time now that the White House use the performance of major Wall St benchmarks as a yardstick for success, and it would seem that 6,500 in the S&P is the level at which the ‘Trump put’ strike price currently resides. In the bond market, which has endured 3 dismal auctions in the belly of the curve this week, that threshold seems to be at 5.00% in the 30-year yield.

Regardless of the exact levels, the sentiment is pretty clear, in that the Admin will, to an extent at least, seek to backstop financial markets. Couple this with the idea that no participant wants to get ‘caught short’, lest they be run over in a face-ripping rally of the ilk that we saw on the back of this week’s 2 Trump U-turns, and you have a dynamic where something of a floor could well now be placed under riskier assets. Still, participants probably won’t have too much comfort in taking risk levels considerably higher just yet, unless and until concrete moves towards an ‘off-ramp’ being taken start to be made.

3 – Iran Are Talking

Despite numerous public pronouncements to the contrary, which are almost certainly aimed solely at a domestic audience, the Iranians are involved in negotiations. To be clear, this is not just me taking President Trump’s remarks about Iran ‘begging for a deal’ at face value – as they’re designed for domestic consumption too! – but is instead a simple, logical examination of the facts as they stand.

The US provided a 15-point plan as a basis for negotiation earlier in the week, to which the Iranian’s responded with a 5-point list of their own. Yes, at the moment, those lists of desires are a long way apart from each other, but not only is that how almost every negotiation starts out, it also shows that there are – be it through mediators or otherwise – discussions of some form taking place. Again, compared to where we were this time a week or two ago, that should be considered as a step, even if small, towards de-escalation.

4 – Energy Flows Remain Interrupted

Despite all of this, the Strait of Hormuz remains essentially impassable. A handful of ships have transited the chokepoint over the last week or so, but overall vessel transits remain at a small fraction of where they were prior to conflict having broken out. At the same time, many of the last LNG shipments to have left the gulf pre-conflict have, or soon will be, reaching their destination ports, tightening supply conditions further.

Meanwhile, markets appear not to have yet fully discounted the longer-term impact of damage to a host of energy infrastructure in the Gulf. Qatar, for instance, have already said that it may take between 3 and 5 years to return normal LNG output at Ras Laffan, with repairs not even able to begin until the risk of kinetic action has diminished significantly. This continued disruption is, undoubtedly, difficult to position for, given how day-to-day geopolitical events dominate sentiment to such a great extent, though the upside seen in long-dated crude and TTF futures suggests that this reality may slowly but surely be starting to get discounted.

5 – Central Bank Pricing Overshot

Last, but by no means least, it would appear that the hawkish repricing seen in front-end STIRs contracts of late has rather overshot reality. At times it’s felt like shouting into a void, trying to explain that there is no linear relationship which means that higher energy prices must automatically equate to higher interest rates, but markets seem to be getting the message to some extent, with pricing having now pared from the extremes seen a week ago.

Concurrently, a host of central bankers have made remarks, with few – besides those at the Norges Bank – explicitly flagging an expectation that policy tightening is imminent. This week’s Fed speakers have largely mirrored the ‘wait and see’ approach outlined by Chair Powell at the March press conference, while those from the ECB have stressed a need for ‘cool heads’. The BoE’s Alan Taylor went further, again stressing a need for calmness, but also noting that the Gilt market sell-off ‘went a little bit too far’.

Conclusion

It’s relatively rare for me to adopt a ‘glass half-full’ approach, but that is where I currently find myself. To be clear, conflict is far from over, and the full economic implications of the present situation will only be known in the fullness of time. That said, a desire to de-escalate does now seem to be present, while central bankers seem to be operating with a more rational mindset. It is, of course, far too early to say that markets, and the economy at large, are ‘out of the woods’, but all this might just suggest that some degree of a floor may now be present under risk assets.