Iran “Deal” … finally
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The US/Iran war nears its end
The US and Iran have apparently reached a deal to end the war. The key pieces of the agreement appear to be:
- End of military strikes
- Re-opening of the Strait of Hormuz
For the economy and markets, the two pieces are probably the most important. It’s interesting to see how markets have moved since the start of the war and now that it’s going back to pre-war state, you’d expect things to revert. But not quite, as we’ll see below.
Equities brush aside war concerns, as AI trade takes over
Since the eve of the war (February 27 - June 15) the major U.S. equity indices have performed as follows:
- S&P 500: +9.8%
- Dow: +5.5%
- Nasdaq: +17.7%
The bottom was on April 30 but the tech-heavy Nasdaq has raced ahead since then. Equities have broadly gained over the same period, with small caps outperforming large and mid-caps. The growth side of the style box has been marginally better than the value side, but not by much. Part of this is because the value side also has AI exposure.
Only one sector, Technology, has outperformed the broad S&P 500 index since the eve of the war. It’s really a story of Technology, which gained a whopping 38.4% over the last 2.5 months.
Oil is still up, but gas prices are up even more
Oil prices have not quite made a full round trip, but they’ve fallen a lot from the peak. Crucially, WTI is back around $80/barrel, which is probably a sweet spot for producers and consumers alike.
While gasoline prices didn’t quite reach their 2022 peak, diesel prices came pretty close. All else equal, as long as oil prices don’t move too much (or continue to drop), we should see gasoline prices continue to fall.
The pain is felt in bond markets, gold
Higher oil prices = higher inflation = higher bond yields but the inflation problem goes beyond energy. Still, we’ve had a fairly significant energy price shock, and that’s going to continue feeding into other prices over the rest of the year via higher prices for intermediate goods that depend on oil.
Here’s how treasury yields have moved since the eve of the war:
- 1-year: +37 bps to 3.84
- 2-year: +68 bps to 4.06
- 5-year: +67 bps to 4.19
- 10-year: +51 bps to 4.47
- 30-year: +34 bps to 4.97
The 2-year treasury yield has surged since late February. The 10-year yield was at 3.94 prior to the war, and it’s surged over 50 bps over the past 2.5 months. Again, this underscores that the inflation problem is more than just an energy problem.
Both 5-year and 10-year real yields are close to their highest levels in a year. It would be one thing if this came on the back of higher economic growth expectations, but right now, real GDP growth is running below trend, and inflation is hot.
Rising real is a big headwind for gold, and gold has taken the biggest hit over the course of the war.
- Gold prices rose 25% at the start of the year
- But prices pulled back 20% since then and are about flat for the year.