Ongoing tensions between the US and Iran have investors reexamining their risk exposures. The hawkish developments occur just as Kevin Warsh gears up in his first week at the helm of the Fed, with stocks extending their fall from Friday.
Outlook
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Oil looked poised to break out today but could not clear the trendline. At least for now, oil bulls will have to wait and see if the market can gather enough momentum tomorrow to finally push through.
Stocks rose last week as peace talks picked up while investors cheered better-than-expected economic news and Q1 corporate results.
What is odd about this whole thing, regarding volatility, is that the ratio between oil and gold volatility is not nearly as wide. Clearly, oil and gold vol are elevated, and S&P 500 vol is not.
Stock markets are not particularly adept at pricing in geopolitical risks as compared to their commodity and fixed income counterparts. At some point, if the situation in the Gulf fails to improve, we will all need to reckon with its effects upon stock valuations.
Stocks were mixed last week as investors gauged potential outcomes of the Middle East conflict amid an ongoing ceasefire.
Once the Bureau of Labor Statistics (BLS) released its March CPI report, the markets received their first ‘official’ glimpse of how the surge in energy prices following the Middle East war, has begun to impact the U.S. inflation setting.
Stocks finished mixed, and 1-year inflation expectations appear to be coiling, with a bullish-looking flag of their own, suggesting higher inflation may be on the way.
Stocks continued to ride the hopeful sentiment of a ceasefire at the start of last week, with all three averages advancing. The S&P 500 has recouped all its losses since the start of the war.
Easing geopolitical tensions and weaker pricing power support a limited inflation impact, while stronger Japanese machinery orders point to resilient growth and a plausible April policy hike.
The possibility of more violence and a potential oil shortage have raised the cost of crude, lifted interest rates and sent stocks south just as the Nasdaq could have posted its 14th consecutive gain.
Global equity markets have been driven to a great extent by the AI capex-fueled tech rally over the last three years. Until recently, there was not much differentiation between the Hardware and Software sectors of the Tech industry.