Oil surged and stocks dropped on Wednesday, after U.S. President Donald Trump said the memorandum of understanding that had provided a framework for the ceasefire with Iran “was over” after the two sides traded attacks overnight.
Here’s a survey of what market observers are saying.
SCOTT CHRONERT, U.S. EQUITY STRAGEGIST AT CITIGROUP
“For now, we will consider this a short-term reversal. We have no insight as to behind-the-scenes negotiations but do maintain a view that President Trump is focused on bringing this conflict to an end. To be sure, a sentiment shift in favor of the broadening call, particularly as Tech has faltered of late, will be tested. Still, with the Q2 reporting period soon to be upon us, we expect a refocus on fundamentals as we head toward midmonth and early earnings reporters.”
DR. ED YARDENI, PRESIDENT OF YARDENI RESEARCH:
“Financial market history shows that geopolitical crises, including wars, often have been good buying opportunities for stocks. That was true during Gulf War III, as the S&P 500 bottomed on March 30 and rose 18.3% through yesterday’s close. The ceasefire in the war between Iran and the US ended abruptly today; will that present another buying opportunity? We think so.”
“The numerous crises and wars in the Middle East since the 1970s have all been good for oil prices, at least initially. The end of the ceasefire today boosted the price of a barrel of Brent crude oil by $4.42 to $78.59 this morning. However, there was a significant bear market in oil before the current war started, which explains why the price didn’t increase much more in March and April than it did and why it came tumbling down in May and June.”
“We continue to recommend overweighting the S&P 500 Energy sector as a hedge against increased geopolitical risk in the Middle East. That’s easy to do since the sector accounts for just 2.9% of the market capitalization of the S&P 500.”
“We view the recent weakness in semiconductor stocks as a buying opportunity. Their meltup over the past three years has been well supported by their earnings.”
BRUCE ZARO, MANAGING DIRECTOR, GRANITE WEALTH MANAGEMENT, PLYMOUTH, MASSACHUSETTS:
“What is interesting to me is the action of oil prices. Oil prices have been on a downward trend... With OPEC coming in and adding more oil to the market, the potential for oil is to go lower and that really takes one of the biggest worries off the table... When I hear that the ceasefire is off, I think it’s a more muted reaction than the market would have put on than even just maybe four weeks ago, six weeks ago, eight weeks ago.”
ANGELO KOURKAFAS, SENIOR GLOBAL STRATEGIST, INVESTMENT STRATEGY, EDWARD JONES, ST. LOUIS, MISSOURI:
“The spike in oil prices and higher bond yields helped drive a near 10-per-cent correction in the first half of the year, but they also underscored the economy’s resilience to these shocks. Renewed geopolitical risks may fuel some near-term risk-off sentiment, but we do not expect investors to react to this round of uncertainty in the same way, for several reasons.
“First, neither the U.S. nor Iran appears inclined toward a prolonged conflict, in our view, and investors have already seen how reacting to fast-moving headlines can lead to suboptimal portfolio outcomes. Second, we think it would likely take a much larger and sustained rise in oil prices to materially alter the outlook for the economy and corporate earnings. Finally, oil supplies have begun to recover, providing a renewed buffer for energy markets, while the improving labor market helps support household incomes—even as the tailwind from higher tax refunds fades.”
STEPHEN INNES, MANAGING PARTNER AT SPI ASSET MANAGEMENT:
“For markets, the implication is cleaner than the diplomacy. The ceasefire has lost its innocence. What was meant to be an off-ramp now looks like a tripwire. Iran tested it. The US fired back. NATO’s top official blessed the response. That does not mean all-out war is the base case, but it does mean the market can no longer price this as a contained diplomatic wobble.”
“The risk now is escalation by inches. Not a single thunderclap that announces a new war, but a series of “necessary” responses, each one defensible on its own, each one pushing the region closer to the edge. That is how war premiums are rebuilt. Not always with a trumpet blast."
FIONA CINCOTTA, SENIOR MARKET ANALYST, CITY INDEX, LONDON:
“This was always a very fragile peace process. The fact that oil prices had already fallen back to pre-war levels suggested that the market was a little bit ahead of itself”
“Oil prices could continue to rise if we see the Strait of Hormuz close again and the unwind of all the positivity we’ve seen over the last few weeks.”
IAN LYNGEN, HEAD OF U.S. RATES STRATEGY, BMO CAPITAL MARKETS, NEW YORK:
“In practical terms, the potential reset on the war in Iran implies that the near-term economic data is less relevant – at least on the margin. June’s core inflation figures will be downplayed in the event that crude oil continues to march higher throughout the month of July. What had been a downward influence on headline inflation (and potential pass-through to core) appears to be reverting to an upside risk. “Putting this in the context of this afternoon’s FOMC Minutes, the official update will now appear somewhat stale given that the Middle East conflict no longer appears to be resolved, or at least on the path toward a near-term resolution. “Nonetheless, investors will be eager for any insight on the extent to which the Fed’s reaction function to the evolution of the real economy has changed under Warsh’s leadership, if at all.”
HAMAD HUSSAIN, CLIMATE AND COMMODITIES ECONOMIST, CAPITAL ECONOMICS, READING, UK:
“The latest exchange of military strikes in the Middle East supports our view that oil prices will be volatile over the coming months, and will face bouts of upward pressure. That said, under the assumption that some form of a ceasefire ends up holding and oil flows continue to recover, we think Brent crude prices will settle close to current levels at the end of this year.”
DEREK HOLT, SCOTIABANK’S HEAD OF CAPITAL MARKETS ECONOMICS:
“US Treasury yields are about 2bps higher across most of the curve. Canada’s cash market opened cheaper by about 5bps across the curve and OIS [overnight index swaps] is moving a few points higher toward getting back to pricing a BoC hike by year-end in keeping with our Q4 tightening forecast.”
“So where to from here? Both sides are erratic and impulsive. Trump has not shut the door on negotiations, yet his deal with Iran was fatally flawed from the beginning by granting pretty much everything Iran asked for and, with it, putting US foreign policy on the back foot in the region. As argued in marketing decks and road shows, I’ve never believed this MOU would be durable and would instead mean a permanently higher geopolitical risk premium. This [bond yield] curve probably has much further to run in my view.”
ANEEKA GUPTA, DIRECTOR, MACROECONOMIC RESEARCH, WISDOMTREE, LONDON:
“It’s a big wake-up call for the markets because the expectation was that following the MOU, we were likely to start to see the flow of oil coming back into the markets. And we saw inflation expectations being dialed down.
“The way we’re looking at it now is what has changed materially is the (Iranian) oil waiver is gone. It’s removed a very key incentive for Iranian compliance.”
“Trump’s comments add that further layer of additional risk premium into the markets. But the reality is with Trump, you always have TACO (‘Trump always chickens out’) trade at play.”
“He was fast approaching the midterm election. The fact that he wanted to do this memorandum of understanding with Iran implied that he wanted to improve his ratings ahead of the winter elections, and that is going to be a critical factor for him to keep in mind.”
RYAN SWEET, CHIEF GLOBAL ECONOMIST AT OXFORD ECONOMICS:
“The cease fire between the US and Iran was always fragile and some flare-ups were inevitable, unfortunately. The question is whether this represents a bump in the road or whether we’re emerging from the eye of the storm.”
“The peace agreement between the US and Iran is the key risk in the second half of this year. It will determine whether the global economy gets an energy-driven disinflation tailwind or absorbs a second oil shock. Recent developments highlight that it’s the key domino that will determine whether other risks are amplified or dampened.”
“If the peace deal breaks, and it’s too early to tell, it won’t just raise oil prices; it would also increase pressure on AI supply chains in Asia, force central banks to be hawkish, tighten financial conditions, and could shift the outcome of the US midterms. The cascade runs fast.”
“It’s unclear how this unfolds but we’re watching whether negotiations between the US and Iran continue, number of ships passing through the Strait of Hormuz, and oil and natural gas inventories.”
ARNE PETIMEZAS, DIRECTOR RESEARCH, AFS GROUP, AMSTERDAM:
“Remember where we came from with oil prices and bond yields. Much higher levels. The market hasn’t reached levels that would panic Trump.”
“And do we take Trump literally or seriously? He says that the peace deal is over, but that U.S. negotiators can continue doing their work. We also know that Trump can turn on a dime. He could have an about-face today, tomorrow, next week, or perhaps later. I don’t see him waging war with Iran into the elections.”
DAVID ROSENBERG, FOUNDER OF ROSENBERG RESEARCH:
“The regime has clearly been playing President Trump, and there is no way he is going back to an official war before the midterms in any event, and Iran knows it. ... The interim peace deal looks to be in tatters, at least for now (“it’s over,” said Mr. Trump — though we can legitimately ask whether he will pivot again before long… but what is interesting here is that unlike his recent scolding to Bibi, the President didn’t come out and say “well, at least nobody died” this time around)."
CHRIS BEAUCHAMP, CHIEF MARKET STRATEGIST, IG, LONDON:
“It’s clearly not what the market’s wanted and it really weighs heavily on sentiment.”
“I think how this will play out is that there will be maybe a bit more of a few more exchanges, and then they probably will go back to the negotiation because both sides want it. So the MOU might be over, but as it proved before that, they didn’t use MOU to have a ceasefire that allowed markets to rally.”
“Things that have come just a long way in such a short space of time, you’d be looking and thinking there’ll be a summer swoon that just weighs heavily on markets and maybe doesn’t take us all the way back to these lows of March. We are overdue a little bit of a spike (lower). We’ve had a relatively quiescent VIX. Everything has been almost too easy for investors.”
KHOON GOH, HEAD OF ASIA RESEARCH, ANZ, SINGAPORE:
“The main thing is really whether or not the Strait of Hormuz remains open and we still see traffic (and) whether or not oil can continue to flow.”
“If there’s still some traffic going through, then I think that will limit how high oil prices will go. It also depends on whether we see a return to the full-on onslaught of attacks, in particular whether or not Iran launches fresh attacks on the GCC neighbors...we haven’t really seen a much broader spillover from the risk off tone yet, because I think markets are just trying to assess what the situation is.
“A lot of the strategic reserves have already run down, so we could get back towards worrying about potential bottleneck shortages once again. But I think markets at this stage don’t want to jump immediately to that conclusion because, everyone did early on and, of course thankfully, it didn’t play out.”