It will be another week dominated by volatility induced from the Iran war and ongoing questions around the key chokepoint for oil flows, the Strait of Hormuz. Crude prices tanked, equity prices hit fresh record highs and bond markets reduced expectations of interest rate hikes on Friday. This came after messages from both sides about the potential reopening for traffic through the Strait. A key step building up to this had also been the 10-day ceasefire agreed last Thursday between Israel and Lebanon, as an end to the fight there is a key Iranian demand. However, all agreements were temporary and appear very fragile with Iranian reports that the vital shipping passage is once again closed. As we have previously stated, a ceasefire deal that leaves the Islamic regime in charge of the Strait is nothing but an overture to a new war in the future. We also keep in mind too Trump’s usual maximalist strategy of escalate to de-escalate into the US-Iran ceasefire expiry on Tuesday.
De facto closure of the Strait would mean a reversal of some of the moves we saw at the end of last week. A bumpy, but non-escalatory path forward has been increasingly priced by markets, and this anchoring of expectations has been critical in preventing a broader risk-off narrative from taking hold. Indeed, many are asking if stocks have got ahead of themselves with the Wall Street vs Main Street theme back in the fold. It seems to us a case of classic de-risking and convergence to benchmark allocations, some normalisation of geopolitics and then re-risking taking place on account of a sharp shift in sentiment and major fund managers playing catch up. That has meant short covering, some FOMO upside chasing especially in the Mag 7 and AI stocks, and an inevitable strong move higher due the hefty weight of those handful of stocks. The upside squeeze is now at risk of overstretching – we note the Nasdaq enjoyed a 13-day win streak, something not seen since 2013.
Away from the Middle East, the Fed has already entered its quiet period ahead of the April 29 FOMC meeting, but it will still be drawing headlines given Kevin Warsh’s confirmation hearing to become Federal Reserve Chair is being held on Tuesday. He has been nominated by President Trump who has demanded much lower interest rates from current head, Jerome Powell. That points to questions on how closely aligned he is with the POTUS thinking. Higher inflation may give Warsh some room to diverge from a dovish stance with Fed independence questions continuing to linger. The dollar suffered eight days of straight losses before buyers stepped in on Thursday and Friday.