TACO Time, Again - Trump Seeks To De-Escalate Middle East Conflict

President Trump, ahead of a self-imposed 11pm deadline for his ultimatum for Iran to re-open the Strait of Hormuz, has once again caught market participants off-guard with a Truth Social post. In the post, Trump notes that the US and Iran have had ‘very good and productive’ conversations, which will not only continue throughout the week, but which have also led to the postponement of ‘any and all’ US strikes against Iranian energy infrastructure and power plants for a period of five days.

Some initial thoughts:

- This is clearly a positive development. The two sides are in discussions, and this is the first material sign of de-escalation that we have seen since conflict broke out at the end of February

- The war is not yet over. While positive, it is only strikes on energy infrastructure that have been ruled out at this stage, presumably meaning that kinetic action will continue elsewhere, at least for the time being.

- There are caveats. Trump notes in his post that the five day pause will be contingent on the success of ‘ongoing meetings and discussions’, meaning that things could escalate once more, if talks were to fall apart.

All that said, we have again found the Trump Admin’s pain point – 5% on the 30-year Treasury yield, and 6,500 in spoos, forcing President Trump to try and find something of an off-ramp, to begin de-escalating military action.

What’s the playbook now? Right now, it’s clearly a risk-on one, with stocks ripping higher, crude benchmarks rolling over, and the dollar being sold hard. How long that lot lasts, though, is contingent on the pause in strikes holding all week, and probably on further progress now being made towards a more material truce or ceasefire, which could well bring things to more of a permanent conclusion. Until that emerges, while the initial market bias has tilted in a positive direction, conviction to take that too much further could well be lacking just a little, with a degree of risk premium still set to be priced into energy benchmarks.

Regardless, this once more speaks to the idea of participants not wanting to get ‘caught short’. For weeks now, everyone has been expecting a U-turn, or a TACO moment, and nobody wants to be the last bear seeking to rush for the exit. Front-running positive news, and perhaps over-extrapolating from a single social media post, makes sense in that light, regardless of how concrete – or otherwise – today’s developments might be.