While we did see a pullback overnight, particularly in the tech sector, markets have not been reacting anywhere near as much this week as they were previously to Iran-related headlines. A couple of weeks ago every announcement on ceasefires and attacks was liable to spark serious moves in either direction. Now though, markets are responding with relative shrugs. The war premium has come out of most markets, certainly from equities. The S&P 500 is trading above 7000, and most of the major indices have touched fresh highs. Oil appears to have settled into a new range, Brent $85 – $100. Even FX markets have for the most part found relatively tight ranges, with outperformance by US equities outweighed by the relative likelihood of rate hikes globally, leaving USD in something of an equilibrium for now.
Is this a new form of the TACO trade? Rather than wait for Trump to back down or reverse through a social media post or otherwise, market participants simply to a large degree ignore the threats in the first place. Perhaps the warnings became so ridiculous, eg mention of ending civilisations, that subsequent rhetoric has been to an increasing extent written off as noise, rather than serious dangers to the world order as they were previously. Having said that, the Strait of Hormuz does remain blockaded with seemingly tenuous ceasefire deals in place. Thus it feels imprudent for traders to completely ignore conflict-related headlines.
On top of that, economic releases will start to show us the true extent of the much talked about forces of stagflation. Australian CPI next Wednesday will be the first significant release to capture and reflect some of the effects of the energy shock brought on by the conflict in the Middle East and the closure of the Strait.
One market moving catalyst that has been on the backburner since the US kicked off their excursion to the Middle East is the tariff wars. Trump reminded us all today however that there are still a number of unresolved deals and potential flashpoints in that department. He made threats of retaliatory tariffs on UK exports if US technology companies continue to be charged the 2% digital services tax. “If they don’t drop the tax, we’ll probably put a big tariff on the UK” he told reporters at the White House. His remarks come ahead of a visit from King Charles next week, foreshadowing a tricky conversation or two over the state dinner table, around the intricacies of the special relationship. A relationship already strained of late by Prime Minister Starmer’s refusal to involve British forces in the Iran conflict. Will we see a revival of tariff tit-for-tat with other nations too? As I write, a US official is quoted as saying that the Pentagon “is exploring options to punish NATO members who did not support US operations against Iran”.
Tesla shares popped higher on release of its quarterly earnings report, adding more to its market cap in that brief moment than the entire market cap of competitor Ford. The ebullience was short lived however. In short, it made money, but it is planning to spend much more. In the investors’ conference call, CEO Musk reiterated that he sees the Optimus robot becoming Tesla’s biggest product. Most significantly he warned of a “very significant increase” in spending, raising forecast capital expenditure this year from $20bn to $25bn. The stock price swung lower as a result; investors evidently losing faith in outsized promises.
Intel reported its quarterly earnings this morning, soundly beating Wall St expectations. EPS came in at 20c, vs the 9c expected. Its stock jumped 20% as a result in the after-market session. Intel is up over 80% year-to-date, benefitting in large part from the support of its largest shareholder, the US government.
Next week we see a cluster of mega-cap earnings reports, including a large chunk of the so-called MAG7. META announced this week that it will be letting go of 10% of its workforce, around 8,000 employees, to free up funds for AI investments. Will others among the tech titans follow suit as part of their quarterly releases and associated conference calls? Late next week Amazon, Microsoft, Meta, Alphabet and Apple will release their Q1 earnings reports.
