The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Tentative
News regarding Iran and the Straits of Hormuz continues to flow but major developments are lacking. The shipping traffic, while non-zero, is effectively zero. Attacks continue and the Iranian regime shows no clear signs of falling nor acquiescing. The news suggests a static political condition but investors are interpreting it slightly positively. Overseas equities rallied small and our market followed suit. Like yesterday, Treasuries rallied and the Dollar dropped. Surprisingly, crude prices climbed today.
The lack of progress in opening the Straits isn’t worrying the markets at this point. I’m not sure if there is a 1-2 week window of patience, where things can remain as-is and investors take it in stride. For the moment, stocks are not acting as though the Straits must open immediately. We are left to wonder when market patience begins to wear thin. It’s an unknowable situation and while the market itself is calm right now, I am feeling the tension and the worry.
This is a secret game of chicken. The market *expects* a headline that points toward a reopening of the Straits. The market is smart enough to know that it isn’t likely in the next 24-48 hours. The market also isn’t priced for a month-or-longer impasse. So the clock is ticking…. But I feel like I’m the only one sweating. Implied volatilities aren’t creeping up as we wait. So the market is just cool as a cucumber even though we’re approaching quite a moment of criticality.
Changing the subject, the Fed makes its next interest rate decision tomorrow. Markets have expected them to make no change for a while now so from a Fed-watching standpoint, this meeting should be unsurprising and not move markets too much. However, markets will be watching the Fed statement and press conference to get a feel for what the FOMC thinks about the Iran war and what they think it will do to the economy.
The market doesn’t know if the FOMC thinks, like the market does, that higher oil prices will produce inflation *that the Fed will need to combat.* Similarly, the market doesn’t know if the FOMC thinks that it should ease financial conditions due to the increased uncertainty and likely economic drag resulting from the Iran war.
The market doesn’t know a lot of things. It’s going to be hoping to get insight into the Fed’s thinking tomorrow. I don’t think the Fed wants to rattle markets so they should just speak in open-ended generalities… but you never know.
See you tomorrow.
-Mike
Visdom Market Commentary
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