U.S. traveling toward an off-ramp in Iran war

Briefing.com Summary:

*President Trump signals a willingness to end the war with Iran.

*Opening the Strait of Hormuz fully is still a work in diplomatic and military progress.

*Oil prices will be the guide for the global economic outlook.

Yesterday, there was a seeming attempt by President Trump to placate the market with the idea that a deal to end the war with Iran could be reached soon. The problem is that the carrot also came with a stick of admission that the U.S. will blow up and completely obliterate a lot of important infrastructure in Iran if a deal is not reached and the Strait of Hormuz is not immediately open for business.

The market tried to rally, but it failed to sustain its hopefulness as oil prices continued to rise and growth concerns continued to mount.

This morning, the equity futures market has been energized by a report that the president is willing to end the war with Iran, even if the Strait of Hormuz is not fully open. It is a peculiar response, because this approach in its own right is not a salve for rising oil prices.

Currently, the S&P 500 futures are up 70 points and are trading 1.1% above fair value, the Nasdaq 100 futures are up 249 points and are trading 1.1% above fair value, and the Dow Jones Industrial Average futures are up 490 points and are trading 1.1% above fair value.

Market participants, however, must feel that the president is forcing the hand of other countries to get involved in opening the Strait given their reliance on energy imports. That feeling emanates from a Truth Social post the president made in which he said, “All of those countries that can’t get jet fuel because of the Strait of Hormuz, like the United Kingdom, which refused to get involved in the decapitation of Iran, I have a suggestion for you: Number 1, buy from the U.S., we have plenty, and Number 2, build up some delayed courage, go to the Strait, and just take it.”

Notably, oil prices have not collapsed on this post, but they haven’t spiked either. They are little changed with WTI crude at $102.77/bbl and Brent crude at $107.52/bbl.

There are some reservations about what the next move will be, diplomatically, militarily, and strategically for shipping lanes through the Strait of Hormuz. However, for a stock market that is oversold on a short-term basis, the headline material suggesting the U.S. is traveling toward an off-ramp is enough to prompt some short-covering activity and some speculation wrapped up in the thought of not wanting to miss a rebound effort.

Oil prices, though, will be the guide as to whether the off-ramp is leading to a dead economic end. In other words, the U.S. may want to be done with Iran, but if the Strait of Hormuz is not fully open, the Iran issue will not be done with upsetting the global economy. 

We’ll see where today takes us. The open will have a positive bias, but that matters little relative to how things close, not just today but over the course of the remainder of this week.