Global Markets Undergo a Reality Check
Iran stomps on Trump's olive branch... Kharg Island is now in sight.
Key Takeaways
Markets Keep Trading Trump’s Volatile Tape: The inmates have been running the asylum ever since Monday morning’s Truth Social posting by President Trump. What I’m specifically referring to are the traders out there who have caused every asset class to hyperventilate on any social media comment out of President Trump or some tape bomb hitting CNBC or Bloomberg News. Markets that become exclusively event-driven are dangerous markets. This is one reason for our sequence of de-risking in the Rosie Model Portfolio these past few weeks. I suggest we pay more attention to what Donald Trump does instead of what he says.
No Clear Path to De-Escalation: My bet is that this attempt at an off-ramp was doomed from the start. Does anyone really think the regime is going to accept the President’s conditions? Iran thinks it’s winning the war despite all the damage to its infrastructure and the taking out of its senior leadership, only for them to then be replaced by a fresh layer of even more hardliners. This perception of an olive branch is coinciding with other Gulf countries now saying they do not want to end the war until the entire Iranian threat is obliterated — and want to join in on the fight (including Saudi Arabia, which has about 300,000 troops). Yesterday, all market pricing tilted towards a conflict resolution. To which I say: a dubious proposition.
Private Credit Stress Keeps Growing: Even if this war ends quickly, what will start to make the front pages is the unraveling in the market for private debt and equity as fears of asset valuation markdowns prompt a redemption wave being met by the gating of the funds. Liquidity restrictions are building by the week, if not the day. A key source of financing for software companies in particular is being choked off, underlined by the fact that the sector stock index has collapsed -30% from the peak. The domino effect is already playing out in consumer finance stocks, which are down -24% from the highs, and regional banks are off -17%. Not to mention that quality spreads have widened out dramatically, by nearly +250 basis points from cycle lows for CCC-BB yield differentials — the proverbial canary in the coal mine that is an early indication of wider credit stress ahead.
