The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Next headline?
Markets essentially treaded water today, waiting for something new and meaningful to happen. The morning started with a bit of risk-off action. The S&P opened down 30 and yields were up across the curve. Oil was higher too. As the day progressed, markets moved in the risk-on direction, undoing some of the early morning moves. We returned to the opening levels in the final hour of the day. Headlines didn’t indicate that good nor bad things were in the works. It was a status quo day and investors didn’t mind the wait too much.
Supposedly, high level US-Iran talks are set for Thursday. The end of Trump’s 5-day pause in attacks is Friday. Some select traffic is traversing the Strait of Hormuz. Apparently, Iran is allowing some ships passage and told the International Maritime Organization member states that “non-hostile vessels” may transit the strait if they coordinate with Iran.
This is a positive development for sure but markets didn’t get excited about it. Perhaps we need a true all-or-nothing event to react?
If that is true, we are on the verge of a large binary outcome for markets. Either Thursday or Friday deliver huge positive breakthroughs for markets. Or they don’t.
If a breakthrough happens, we’re looking at 2-plus percent gains in the S&P, 10-plus bips of falling yields across the curve, and $10-plus declines in crude.
I don’t think the risk-reward is symmetric though, since we’re already priced with negativity. That said, if the breakthrough doesn’t happen, I’d guess everything moves the other way by less, maybe two-thirds?
If the probability of a good breakthrough is high enough, that’s a good risk-reward. I wonder what the chances are? I wonder if there are significant amounts of capital that want to get out of the way during this wait.
See you tomorrow.
-Mike
Visdom Market Commentary
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