The bulls are back in charge as dip buyers have stepped in on the expectation that we could soon see the end to the conflict in Iran, thus normalising energy prices and presenting a buying opportunity after recent declines.
In Europe, the mainland markets have recovered by over 2%, with manufacturing stocks particularly gaining traction as fears around soaring input pricing ease.
Notably, this all came off the back of a series of comments from Trump who stated that the war would resolve “very soon,” although that resolution looks unlikely to come this week.
Coming just a few days after he laid out plans for a campaign that could take over a month, Trump’s suddenly stated that they were “very far ahead of schedule,” with their objectives suddenly deemed “very complete.”
Given the fact that Trump came into this conflict calling for regime change, the narrative appears to be shifting in a direction that will likely instead focus on setting back the Iranian regime without lifting inflation to a degree that would hurt Trump’s Midterm hopes.
The question for markets is whether this is simply a stalling tactic to ease market jitters that had sent WTI to $120.
To a large extent, the direction of travel for this conflict is as much in the hands of the Iranians as Trump’s, with the end only confirmed once Iran opt to allow safe passage for ships in the Straits of Hormuz. Hence, the comments from the Iranians that they wouldn’t allow “one litre of oil” to flow out of the region if the conflict continues brought a renewed vigour from Trump, threatening “death, fire, and fury.” As such, the conflict rumbles on, although with perhaps less pressure for the time being given that Brent crude trades 22% below yesterday’s high.
The job for Trump is to ensure markets believe we are on the cusp of a resolution to the war, keeping a lid on prices. Although that will only last so long, with lasting implications for crude production in the Middle East if this conflict continues to shut in or damage production facilities.
Today brings a fresh look at the US inflation picture, with the latest CPI gauge bringing fresh insights against a backdrop of surging inflation expectations from energy gains. Notably, energy accounts for roughly 6% of the total CPI figure, highlighting the limited ability to spark a sharp rise in the inflation number without also seeing indirect factors such as food prices come into play.
While today’s release won’t reflect any of the recent energy price volatility, a higher-than-expected reading would provide the basis for greater concern given the expectation that we will see higher prices coming into play in the event of a drawn-out period of higher energy prices. Notably, the pullback in oil prices has provided markets with some hope of a pathway lower for interest rates, with two-rate cuts now back as the base case scenario (just about). Nonetheless, the ability to drive down inflation has been key to this narrative, and thus the dollar looks poised for fresh volatility in the event of an inflation figure that shifts the dial on rate expectations once again.
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