The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Two weeks.
Yesterday a two week ceasefire was announced and markets jumped for joy. Europe rallied 5%. Asia rallied 3-5%. Our futures implied a 2% rally. Yields came down across the curve and oil fell hard. The Dollar fell modestly.
Obviously markets were happy that the escalation in the conflict was averted. The next two weeks, should everyone hold to their side of the bargain, should be business-as-usual for shipping traffic in the Strait of Hormuz and prices for all dependent commodities and products should drop. Markets are currently assuming that everything is going to go smoothly. We shall have to see.
The natural question is what about two weeks from now? Will a deal be made by then? We obviously don’t know the answer but investors seem quite confident that positive progress in coming. Why? Why are markets leaning towards optimism so heavily?
Perhaps the two week pause is an indication that both sides are playing a brinksmanship game and the markets are wise to it. Whether we have to go through this theater again, or ten more times, markets perceive that the end game was revealed. *Some* kind of negotiated agreement is on the horizon and it will result in normalized commerce for the region, which is what markets mostly care about.
It’s a bold view to have, that, commercially speaking, the worst is behind us. Yet markets have embraced just such a bold view. If the negotiation process ever breaks down, it will take the dropping of bombs, to reverse the perception of markets. Markets watched yesterday’s game of chicken, and they observed that it was called off before the denouement. Rightly or wrongly, the conclusion is now reached that the players in the game don’t want to step things up dramatically. As a result, markets are speculating that the positive ending, at least as far as *commerce* is concerned, is a high probability outcome.
Now markets will wait an official moment, when the last bit of discounting can evaporate.
I hope markets are right.
See you tomorrow.
-Mike
Visdom Market Commentary
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