The news of Iran’s Supreme Leader forbidding uranium removal earlier in the day weighed on risk sentiment sending stocks lower and oil sharply higher. WTI oil has now erased all yesterday’s losses as risks for a more prolonged US-Iran stalemate increase.
Yesterday, after the close, we got strong NVDA earnings but the stock failed to rally significantly and it’s now seeing some choppy price action at the open. What matters for the markets is not the Q1 earnings, but how things are going to look like in the next 6-12 months.
For now, I keep my view that we have reached an inflection point and for further upside we will need an official resolution on the US-Iran front and the reopening of the Strait of Hormuz.
In fact, it wasn’t just the US-Iran de-escalation supporting the stock market since April, but also the Federal Reserve’s easing bias. This has led to an easing in financial conditions even without rate cuts as real yields fell. The Fed is now abandoning the easing bias as seen also yesterday with the FOMC meeting minutes. These are generally subtle moves before a pivot in monetary policy.
Yesterday, we got the Bank of America Fund Manager Survey where “just 4% of fund managers see a hard landing” ahead. I think that’s the strongest signal of too much optimism if you couple it with the “record rise in equity allocations in May”. There’s too much good news already priced into the market.
Although a second wave of inflation is now the biggest tail risk, Fed rate hikes would be even worse. If conditions in the Strait of Hormuz don’t change and oil prices remain elevated, then Fed tightening into such conditions would trigger a crash in the stock market and that’s when the hard landing probabilities will start to climb quickly.
This article was written by Giuseppe Dellamotta at investinglive.com.
