Investors give peace a chance — for now
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The U.S. and Iran agreed to a two-week ceasefire Tuesday night — with a commitment to open the Strait of Hormuz — and oil prices plunged, the biggest one-day fall for Brent crude since the 1991 Gulf War.
Why it matters: Investors seemed to see it coming, even as many others agonized over President Trump's threat to eliminate Iran's "civilization," and stocks barely flinched Tuesday, just as they have declined only modestly since the war started.
The latest: Asian markets rallied overnight, and European markets were sharply higher Wednesday.
- S&P 500 stock index futures were up 2.7% Wednesday morning, while Nasdaq futures were up 3.5%.
- U.S. Treasury yields retreated as inflation worries eased.
Friction points: It's not totally clear what Iran's pledge to open the strait will mean in practice, at least initially. The question is: Will shippers feel secure enough to navigate passage?
- "Ship operators' confidence that they won't be attacked is the one and only litmus test to assess whether energy flows are likely to resume," Clayton Seigle, an oil analyst at the Center for Strategic and International Studies, told Axios' Ben Geman and Chuck McCutcheon Tuesday night.
- Shipping giant Maersk told Reuters Wednesday morning that it did not have the certainty to resume normal operations.
- The AP is reporting that the deal allows Iran and Oman to charge fees for transit through the strait.
The big picture: It is only a two-week agreement. And the economic fallout from the biggest oil disruption in history is hardly over.
- Economies, particularly in Asia, are shell-shocked and facing shortages. The hits to critical energy infrastructure could take months or longer to repair.
- The global energy market could now be changed forever. The situation is your latest reminder that the stock market is not the economy or even a gauge of public opinion.
Investors Tuesday appeared to be looking past all that, confident in the "Trump put."
- "The president likes a lot of drama, so over time, investors have become conditioned to that language, but they don't actually expect that kind of devastation he writes about," says José Torres, senior economist at Interactive Brokers.
By the numbers: The S&P 500 is down about 4% from the start of the Iran war, having bounced back from when it briefly flirted with a correction.
- And now there's buoyancy and an expectation for a solid season of corporate earnings about to get underway.
Reality check: It's been a pretty volatile few weeks, and many institutional traders have felt frustrated by the wild rhetoric and conflicting messages from the White House.
- "This market is neither investable nor tradeable due to headline risk, rumor and policy unpredictability," RSM chief economist Joseph Brusuelas told Axios last week.
Zoom out: "Is it just a kicking [of] the can down the road, moving the goalposts, TACO Tuesday, or whatever metaphor we'd like, to only to have tempers flare and bombs drop again? Who knows?" writes Brian Jacobsen, chief economic strategist at Annex Wealth Management. "But it's good enough for now to elicit a positive response from the markets."
What to watch: Even if the strait is reopened and shippers feel safe, oil analysts say the war has changed the way Iran is thinking about the narrow waterway.
- "The closing of the Strait may have begun as a tactic to pressure the U.S.," JPMorgan commodity analysts wrote Tuesday afternoon. "But it is increasingly viewed by Iran as a strategic objective with potential economic and financial gains that it could seek to formalize and make permanent.
The bottom line: It was a TACO Tuesday after all — investors just had their orders in early.
