A Hope-Based Stock Market Rally Takes Hold
Markets see a light at the end of this dark tunnel.
Key Takeaways
A Relief Rally but Not a Clear Turning Point: Yesterday’s lights-out rally in the stock market may have had less to do with the so-called “end of the war” trade and more to do with month-end and quarter-end market positioning in a market that was near-term technically oversold. Keep in mind that all the major indices are still mired below their 200-day trendlines. Let’s not go any further than that. It’s mostly technical. The all-clear for the risk-on trade in any meaningful way hinges on the full reopening of the Strait with no more drone threats and no fees being collected by the regime to cross it.
Markets Cheer Hopes of a Short War: The market mood remains bright into the wee hours of Wednesday as President Trump stated that he will end the war in two to three weeks with or without a deal (reducing fears of a prolonged conflict), and the UAE issued a statement that it will join in the fight to take over Kharg Island, and Bahrain is working on a UN Security Council resolution to try and reopen the Strait of Hormuz and provide a mandate to a naval task force. All the while, a third U.S. aircraft carrier strike group is heading to the Gulf, and the President apparently is also going to be addressing the nation at 9:00 p.m. Eastern time.
Private Credit Risk Runs Wide: Nobody should be underestimating the extent to which private credit is interconnected with other parts of the financial system — primarily the insurance companies and, indeed, some of the biggest banks, and not just the regionals. Researchers at the Boston Fed concluded that the banking sector’s relationship with private lenders is “extensive” and issued a warning that “those links indirectly expose banks to the traditionally higher risks” associated with this space.
