Deal or No Deal?

Today is a big day for potential deals.  There is of course a major IPO that will begin trading sometime today, but the broader story revolves around yesterday afternoon’s announcement that a deal with Iran seemed imminent.  We’ve heard that before – as much as 50 times, by one count – but traders took that announcement much more seriously than usual.  Stocks soared, and more importantly, oil plunged.  We seemed to be treading water during early trading, but a supporting tweet from the Iranian Minister of Foreign Affairs contributed to the hopeful sentiment.

The bump in stock markets and plunges in bond yields and oil prices followed a post at 1:28 PM ET on Truth Social stating not only that another round of scheduled strikes on Iran would be cancelled, but that a deal seemed to be imminent.  We’ve seen plenty of threats about strikes come to naught, but the language about the likelihood for mutual approval was more tangible than usual.

Source: Truth Social

That post was bolstered by comments that the President made during a televised Oval Office meeting.  Those included an acknowledgment that the US will end its blockade immediately once it’s signed.  It was not immediately clear whether this would be a memorandum of understanding, a ceasefire, or a full cessation of hostilities, but it was easy to take as a positive nonetheless – especially after a few rough days for major indices.

There was some initial pushback from Iranian sources, clouding the prospects, but then this was posted by Iran’s Minister of Foreign Affairs around 10:57 AM ET:

Source: X

Stocks were trading sideways before that post and then perked up afterwards.  That said, we have not seen a huge ensuing rally in stock prices as I type this around noon ET.  The reaction was so sharp yesterday that it would be quite understandable if the good news was largely priced in already, though oil is now another 3.5% lower. 

There are two key questions that we will take into the weekend. 

First, there is always the prospect that the deal is not hammered out by Monday or that it is less meaningful than advertised.  Considering the track record of deal pronouncements over the past few months, this is of course a real possibility.  Indeed, the statements from both parties seem more concrete than usual, but this is a fluid situation that already has yielded a significant set of market reactions.

Second, there is also the possibility that after weeks of “buying the rumor,” we could “sell the news” if a deal is reached – particularly if it hews more towards a memorandum of understanding rather than a full peace agreement.   It’s the way that markets have worked for time immemorial, so it can’t be dismissed now.

To that end, I offer the following chart.  It shows the S&P 500 (SPX) and Brent Crude futures over the past three months, with arrows pointing to dates when hopeful news about peace talks emerged.  The dates are taken from economist Justin Wolfers’ Substack[i], and best efforts were made to match weekend pronouncements with the subsequent trading day.  (Ignore the direction of the arrows – it was only about where I could fit them on the screen.)  Bottom line, stocks were already in rally mode, largely thanks to well-received earnings after a decent selloff, and hopeful announcements often provided a boost.

3-Months, SPX (red/green daily candles), August Brent Futures (blue line), with Arrows at Trump Announcements about Peace Talks

Source: Interactive Brokers

[i] Some of you might scoff that the source is considered partisan, but his dates are backed up by external sources.