The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Iran deal
News of a US/Iran agreement broke over the long weekend and markets reacted positively. The usual war-is-ending trades prevailed. Crude fell, yields fell, and stocks climbed. Unlike previous war-is-ending moments, precious metals were mixed and the Dollar was flat. Perhaps those markets needed more than rumors of an almost-deal. Regardless, morning enthusiasm resulted in the S&P opening about +40, climbing to an intraday and all-time high around +70 an hour into the session. Prices retreated some on the usual confusion regarding the US/Iran situation and the S&P spent the day in the +30 to +50 gain range.
One can rightly argue that markets have mostly priced in a peaceful resolution to the US/Iran war as well as a reopening of the Strait of Hormuz. It’s unclear how much more price movement we will see once the ink is dry and the details are known *and* the ships resume sailing through the Strait. My guess is we’ll get a similar move to today. That will cover the short-term market reaction.
The medium-term reaction will be a function of oil price movement. Crude prices will not come crashing down. They will steadily sink. This will provide a wind at the back of equities and bonds. How much medium-term help could we get?
It’s a good question and it’s probable that it will be significant. Look at the change in the yield curve since late February, which was just before the attacks on Iran.
From 2 years out to 30, yields are still 41 to 67 bips higher. There’s a lot of yield to shave as crude prices drop. The bond market will anticipate a fall in medium-to-long term inflation. That will buoy bond prices for a while, months probably. That will help stocks. It will be quite a virtuous circle *as long as* crude prices steadily fall.
It might be out of consensus to look at the S&P 500, at these levels, after this incredible rally, and still be bullish… but I think that’s exactly right. When we get the official US/Iran agreement, there will no doubt be a nice little bump in prices.
But once Persian Gulf trade resumes, and the oil flows, and the oil curve drops day after day, the bond market will respond in kind, and the equity market will benefit.
It could be a very lucrative summer for the longs and I don’t think currently overbought technicals will matter on iota.
See you tomorrow.
-Mike
Visdom Market Commentary
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