Aluminum Prices Join Oil on an Upward Trajectory as War Enters Fifth Week
As the war escalates, global recession risks rise
Key Takeaways
President Trump Seeks a Deal, While Sending More Troops: Those who had high hopes for the war to be a 4-to-6-week affair are now confronting the likelihood of a negotiated ending in which Iran retains an implicit veto over the Strait. You would think this is a nonstarter, but then again, Trump is a deal guy and is now clearly looking for a way out. The administration has been sending mixed signals, proposing peace plans while sending soldiers to the region. So long as the Strait is effectively closed, global recession risks rise by the day.
Risk Premia Will Remain Elevated: This is a perfect storm where virtually no tools or wartime playbooks are working. And we now have to consider, given the pressure that Trump is under at home (where public support for the war is collapsing), what it would mean to actually end the war, but with Iran in control of the Strait. For investors, that prospect is not exactly going to allow risk premia to come down or for any meaningful passage of cargo through the Strait, knowing that it would only take one drone to take a ship down.
No Indicators of Panic Yet: There has been clear damage done to the stock market, but there is no sign of a bottom just yet. The S&P 500 is down about -9% from the January peak, but for some perspective, that is only half the decline posted during last April’s “Liberation Day” pullback, and also less than half the total drop during Gulf War 1 in 1990-91. The issue here is that the S&P 500 still trades at just under 20 times forward earnings and 23x on a trailing basis. Market Vane bullish sentiment is 60%, far above the 20%-40% range that in the past put an end to corrections. Same for the VIX at 31 — that would have to get to 40 or even 50 to mark a “washout low.” So, anxiety is evident, but panic has yet to arrive.
