Forgiven
Even with an equity correction underway at the start of yesterday’s session, it still appeared that the market was under-pricing the risk of a protracted conflict in the Middle East. FX and fixed income asset classes had reacted more severely with stronger defensive bids into currencies including the Dollar and Franc, but still the adjustment was limited. Surely, in the face of missiles being exchanged on a daily basis, markets weren’t just pinning their hopes on a TACO-style trade?
At the start of yesterday’s session, a move that many felt was overdue under the circumstances materialised: oil pushed through $100 per barrel with Brent topping out just shy of $120. The rest of the European session saw prices consolidate in excess of, but closer to, $100. That prompted a series of events that included emergency meetings of finance ministers and a flight to safety in markets. Higher energy costs pushed wider commodity prices far higher and the Dollar advanced once again but failed to break materially higher than in the prior session.
That was until last night when a teleprompter driven speech by the President claimed people would see the conflict with Iran would be over very soon. Oil benchmarks dropped back below $100 immediately and traders rushed out of the Dollar, sending EURUSD almost one cent higher. This morning, prompt Brent traders around $90pbl decaying below $80 from August. Hook line and sinker for markets it seems then. The United States’ ambition to militarily cripple Iran may limit the ability for Iran to perpetuate this conflict, that is known. But the willingness shown to retaliate at not just the US but regional US allies in the Gulf, and with inexpensive weapons, means the US military is not the only force in control of the destiny of this war. President’s Trump’s reaffirmation that this war should be over soon is a risk-positive event, granted. But there remain value-destructing outcomes that are just not priced into markets.
Discussion and Analysis by Charles Porter
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