Trump says Iran war "close to over" amid hopes for more negotiations
President Trump struck a tone of nearing finality on the war with Iran at a speech in Miami, and ahead of that managed to shape market pricing in the US afternoon by getting the message out ahead of time. It was effective. The US will remain in the game, but more in the guise of a tidy-up exercise. Big market moves in consequence. Now the dust settles
The War Goes On, but It’s Not the Same War. Markets Can Re-focus Elsewhere for a Bit
The attack on Iran was not quite a surprise, but actually was. Now President Trump has surprised us again, but this time in the other direction, signalling an imminent pull-back. If true that a pause or exit (even if short term) is accurate, it would certainly be politically expedient. It’s hardly a war that has had widespread support. Given that, a quick war is better for the Trump administration than a protracted one. Markets have clearly done some talking here, via the higher oil price, elevated volatility, no lower yield dividend, and a risk-off tone that had threatened to get much worse. The impact reaction has been a reversal of many of these directional outcomes.
To put some numbers on this, the price of oil ended Friday at US$90/bbl, it shot up to US$120 on Monday, and is now back down to US$85. Those are phenomenal moves, in both directions, and are reflected in all types of market indicators. VIX volatility has done something similar, alongside a rotten feeling in risk asset space on Monday morning morphing to a quite cheery one late on the same day. The US 2yr break-even inflation rate, which had shot up to 3.25%, is now on the verge of breaking back below 3%. We are still at troubling levels, with the oil price at 85, VIX at 25 and the 2yr break-even at 3%. But well off prior highs, and the prior journey to day-on-day new highs has been abruptly reversed.
Real yields have also shot higher in short tenors, signalling a ratchet down in macro angst. The 10-yr nominal yield has edged lower, now down to the 4.1% area. It had been at over 4.2% earlier in the day, mostly on a further unleashing of higher inflation expectations. Before the strikes, the 10-year yield had in fact dipped briefly below 4%. And since then, we’ve had quite a poor payrolls report (-92k), which can allow markets to re-focus on the domestic economy. That said, we’re not quite sold on the idea that we should sail below 4% now. We’ve still got an inflation hangover from all of this to have some effect, and an ongoing tariff effect, even if considerably slower than anticipated.
Expect risk to get bought for a bit, but don’t get too carried away with this. Expect short-dated inflation-linked bonds to get sold (higher real yields). Expect volatility to calm. Expect nominal yields to fall for a bit on a reversal trade. But don’t expect a dramatic structural rally in bonds. Remember, we still have clear inflation impulses to overcome, and the economy is down but not out.
Tuesday’s Events and Market View
Data likely still ranks secondary in the current environment. Headlines and what happens on the political stage are likely more relevant. In Europe, eyes will be on the ECOFIN meeting and comments from ECB officials, where Simkus and Muller are slated for the day.
In terms of data, the US sees the release of weekly ADP jobs data as well as the NFIB small business indicator and existing home sales numbers.
Primary markets will be looking at the EU’s syndicated sale of a new 10y bond also as a gauge of the broader state of the market. Austria auctions 7y and 10y bonds (€1.73bn), while Germany sells 2y bonds (€5bn). The UK is in the market with a syndicated 11y green gilt while the US will auction new 3-year notes (US$58bn).
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