James Brodie
Head of Learning & Development, Flux
Rumoured US-Iran Negotiations on Equities, US Home Sales Fall, IEA Warning
Equities rise on talks & short squeeze; housing weak, IEA warns supply crisis, blockade risks grow, markets trade hedges over headlines
With rumours of new U.S.-Iran negotiations on Thursday equities rallied 1% from the open as CTAs shorts continued stopping out.
The S&P500 is bizarrely now higher than it was on Feb. 27 before the conflict started. Earnings matter more than geopolitics and with earnings moving higher, equities have effectively become cheaper, for now (Chart 1, Bloomberg, Mike Taylor). Plus, firms are still guiding higher and from 30th March the short-term trend has been higher, a pain trade stopping out shorts. Cumulative flows into US-listed ETFs continue to surge (Chart 1, Bank of America Global Research). But in the current environment expect increased selling towards the 7,002 all-time high, while key support remains at 6,316. Of course, as/if the conflict continues earnings will deteriorate rapidly.
Sales of previously owned US homes fell in March to the lowest since June, highlighting the weak housing market, with mortgage rates climbing aggressively since the start of the conflict. Contract closings decreased 3.6% to an annualized 3.98 million, according to National Association of Realtors data out Monday.
International Energy Agency, which warned oil prices don’t yet reflect the severity of the unprecedented supply crisis. About 13 million barrels a day of oil supply have been shuttered by the war, with more than 80 energy facilities damaged, IEA Executive Director Fatih Birol said. “Prices are already high, but they are not reflecting the severity of the problem,” Birol said. “I think soon we will see they will converge, which is an extremely sensitive issue for the global economy.” Even worse recovery could take as long as two years.
The US blockade will stop Iran exporting energy, or importing food, industrial parts, or weaponry by sea. The economic impact will be enormous, and in around 13 days, Iranian oil storage will be full, forcing well shut-ins and risking permanent supply-side damage. Iran exports oil, but it also imports gasoline and diesel. Iran lacks the ability to refine enough of their own oil into gasoline and diesel. So very soon Iran will be running out of fuel everywhere. The US blockade of Iranian ports is set to immediately affect up to 983,000 tons of food shipments currently in transit to Iran, hitting food imports rapidly unless the US fully grants exemptions, per Kpler.
Chinese Defense Minister Admiral Dong Jun: "We have trade and energy agreements with Iran; we expect others not to interfere in our affairs. The Strait of Hormuz is open to us." China is issuing a warning to the US.
Japan reported a refinery utilization rate of 61%, and that’s with a strategic petroleum reserve (SPR).
German Chancellor Friedrich Merz said on Monday that gasoline / diesel duties will be cut by 17 cents per liter for 2 months to cushion the impact of the US-Iran war.
Financial Times says it all (Chart 2, FT)
73% chance the IRAN WAR ENDS by April 30th, per Polymarket
Market flows are dictated by two-way hedging structures relevant as market balances diplomacy vs disruption.
But instead of trading headlines and Trump tweets lower risk strategies are trading cross product and curve spreads.
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