(May 4): The month-long surge in risky assets faces another test as investors gauge the viability of the latest Mideast truce proposals and await a key US employment report to assess the war’s economic impact.
President Donald Trump said in a social media post on Sunday that the US will begin guiding some ships that aren’t involved in the Iran conflict out through the Strait of Hormuz starting Monday. He also said US representatives are having “very positive discussions” with Iran that could lead to something “very positive for all.”
On Saturday he said he’d been briefed on the “concept of the deal” from Iran to end the war, which is now in its third month, but later cast doubt on whether it would be acceptable.
Crude prices eased last Friday and Treasuries briefly erased declines on reports a proposal was made to the US through Pakistan. West Texas Intermediate oil settled near US$102 a barrel, while Brent was around US$108, after setting a four-year high last week. Trading in US stock, bond and oil futures resumes in earnest at 6pm New York time on Sunday. As markets reopened in Asia, the US dollar slipped against most major peers, with the risk-sensitive Australian currency among the top performers.
“The market is being very patient with this level of uncertainty because it is focused on the other side of the conflict, which may be too optimistic,” said Joe Gilbert, a portfolio manager at Integrity Asset Management. “The economic damage being done will be more materially felt in the next month.”
Iran’s proposal called for a complete end to the conflict within 30 days along with guarantees against renewed strikes, the semi-official Tasnim News Agency reported. The plan reiterates Tehran’s earlier demands, including that US forces withdraw from near Iran, a maritime blockade be lifted, sanctions removed and reparations paid, it said. On Sunday, Iran said it received the US response to its plan via Pakistan, and is reviewing it.
Traders have mostly set aside concern about the economic fallout from the hostilities, with signs of corporate resilience driving stocks to their best month since 2020. About 81% of the S&P 500’s companies have beaten first-quarter earnings estimates, according to data compiled by Bloomberg.
Forecasters expect the April jobs report last Friday to show a solid 62,000 increase in payrolls, accelerating wage growth, a stable unemployment rate and an uptick in labour-force participation. Private-sector job growth was probably even stronger, based on a Bloomberg survey of economists.
The S&P 500 Index and Nasdaq 100 ended April at highs. Risk-taking went beyond equities, with high-yield credit spreads near multi-year tights and retail traders piling into prediction markets and zero-day options. The rally has held through the war in Iran, oil above US$100 a barrel and a Federal Reserve that has signaled rates will stay higher for longer amid elevated energy costs.
See also: OnlyFans tops US$3 bil value in advanced stake sale talks
‘Tail risk’
“You could certainly point to the corporate profits and amazing earnings season we have here,” said Eric Sterner, the chief investment officer of Apollon Wealth. “But I don’t think the market is properly discounting the tail risk that this conflict can last longer.”
While the Fed voted on Wednesday to hold rates steady and keep a preference toward easing, three board members said the bias went too far, warning that rising oil prices threatened to revive inflation and require tighter policy.
“The conflict in the Middle East raises the prospect of prolonged or repeated supply disruptions that could create further inflationary pressures,” Dallas Fed president Lorie Logan said in a statement last Friday. “It could plausibly be appropriate for the FOMC’s next rate change to be either an increase or a cut.”
With the US-Israeli campaign of air strikes suspended, Treasury Secretary Scott Bessent said the US is “suffocating” Iran with economic and financial pressure.
“We are running a marathon over the past 12 months and now we are sprinting towards the finish line,” Bessent said on Sunday on Fox News’ Sunday Morning Futures. “They are not able to pay their soldiers. This is a real economic blockade.”
The comments reflect the Trump administration’s efforts to squeeze the Islamic republic with measures including a naval blockade to cut off Iran’s oil exports, depriving Tehran of its main revenue source.
“At this point there’s already a decent amount of risk priced in, so unless something actually changes like a real breakthrough or clear escalation, then things probably just move around rather than trend either way,” said Haris Khurshid, the chief investment officer of Karobaar Capital.
Uploaded by Isabelle Francis
