All things considered, markets are taking the latest escalation in Middle East in stride. President Donald Trump said at the NATO summit in Turkey that the U.S.-Iran ceasefire is “over.” He added: “I don’t want to deal with them anymore. They’re scum.” Comments such as those would have sparked a massive decline in equities and a surge in oil prices a few months ago. While stock futures were under pressure, and crude was up, the moves weren’t as sharp as they could have been. S & P 500 was down just 0.6%, shortly after the open, while U.S. oil prices traded about 5% higher — below their highs of the day. Several traders noted one reason for the muted reaction is neither side wants to prolong the war. “The situation has not materially changed with neither US / Iran showing a desire for an extended conflict,” JPMorgan’s trading desk wrote. Indeed, Trump also said negotiations to end the war can continue. @SP.1 @CL.1 1D mountain WTI and S & P 500 futures intraday chart “While the current détente is certainly under strain, we continue to think the White House is extremely reluctant to escalate militarily and fully return to hostilities and therefore, a deal remains much more likely than not (unless Trump plans on putting troops on the ground, which he clearly doesn’t want to do, a negotiated settlement is the only way to extract himself from a war he regrets starting),” wrote Adam Crisafulli of Vital Knowledge. To be sure, the latest events and attacks along the Strait of Hormuz cloud the outlook for a resolution to the conflict, leading investors to trim exposure to gold and global bonds amid fears of elevated inflation. The benchmark 10-year Treasury note yield rose 4 basis points to around 4.57%. The U.K.’s 10-year Gilt yielded 4.923%, up 7 basis points on the day. The 10-year German bund yield also climbed around 7 basis points to 3.056%. “The market is now left to ponder whether the renewed attacks are simply an iteration of the negotiations or if Trump has abandoned the peace talks for the foreseeable future. In the case of the former, one might look back on this episode as an interlude, not the end, in the negotiations,” wrote Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. “The weightier risk is that the conflict’s timeline has been effectively reset and investors are facing months of uncertainty for the global outlook yet again.”
Why the drop in stocks and oil market reaction is not worse after Trump’s comments
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