The US-Iran conflict continues to keep markets on edge but the coming day will be all about what US president Trump has to say. He is scheduled to deliver an address to the nation at 0100 GMT, with “important updates” on Iran. And he already gave a bit of a teaser yesterday in saying that:
“I had one goal. They will have no nuclear weapon, and that goal has been attained. They will not have nuclear weapons. But we’re finishing the job, and I think within maybe two weeks, maybe a couple of days longer, to do the job.”
In essence, his address later looks to be one to hang the “mission accomplished” banner while trying to reaffirm to markets and the public that they will still need a few weeks to “clean up” what is left of the task.
Thus far, this is all keeping markets optimistic with equities pushing higher after the strong gains yesterday. Oil prices have also come off the boil with WTI crude fluctuating in and around the $100 mark. Meanwhile, 10-year Treasury yields have also dropped further to 4.28% today.
So, what can we really expect if and when Trump delivers this message?
Well, the headline reading will certainly present some added relief for markets. That mostly because it is a clear enough signal that this war has pushed Trump to his limits in terms of what he is willing to accept in markets. Right from the get go, it had everything that he hates happen all at once.
But while markets might try to put the whole issue in the rearview mirror, it might not be as simple.
On previous occasions such as the US-China trade deal, Beijing was happy enough to let Trump go back to brag about “winning” and all the great “deals” that was struck. And while markets moved on and didn’t bother about it after, the fact of the matter is that China did not deliver more than a couple of goodwill gestures at the end of the day.
Think back to the whole drama in 2018-19 that resulted in the Phase One trade deal. And look how that has become obsolete almost immediately after and already long forgotten by today.
China’s strategy is simple enough, that is to hunker down and to ride out the storm. In other words, exchange some pleasantries and let Trump brag about the things he want while waiting out his term as president to end.
The difference between that and Iran lies with the Strait of Hormuz. At present, Iran holds the cards as they are maintaining control over the strait. In turn, that spills over to oil and energy prices and then the global economy.
Trump might want to concoct a ruse in appealing to his voter base but will Iran corroborate with the story? That is the main thing now.
I don’t imagine Iran will want to keep up the conflict and ongoing tensions. However, will they have a choice if Israel keeps up the aggression even as the US pulls back?
And with their ace in the hole being that they are in control of the Strait of Hormuz, they might not want to reverse the situation so quickly. That until they get assurances and evidence that the US is indeed going to be leaving things alone in that part of the Middle East.
Otherwise, we might see some resumption of passage through the strait. However, it is not likely that it will quickly lead to a return to normality to what we have seen before the conflict began.
If that is the case, there is a clear black and white for markets to work with – unlike the lesser intrigue of trade numbers (which takes time to parse). If there are no ships or still a very small number of ships being able to pass through the strait even after Trump declares “victory”, it doesn’t really change much of anything for markets.
In time, one can expect Iran to perhaps loosen restrictions as the US gradually cedes control. But until then, it could still mean a couple more weeks or maybe even a month or two of the status quo (more or less) still playing out.
And I fear that is something that markets are severely underestimating at the moment. That as “mission accomplished” doesn’t really do anything unless it comes with the reopening of the Strait of Hormuz.
This article was written by Justin Low at investinglive.com.
